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Which of the following is an effect of managers increasing the amount of debt used in...

Which of the following is an effect of managers increasing the amount of debt used in the firm's funding mix?

Multiple Choice

  • the rate of return on common equity increases

  • a. and c.

  • the chance of financial distress or bankruptcy increases

  • the expected rate of return on assets increases

  • the number of shareholders increases

Solutions

Expert Solution

The answer is a. and c.

Rate of return on common equity increases as lower interest is paid on debt which leaves higher amount for the shareholders

However, adding debt also increases the risk of bankruptcy

Return on assets might/might not change

Number of shareholders will not increase when debt is issued

jeff jeffy answered 2 years ago
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