which one is more risky debt or equity

Expert Solution

Equity is more riskier than Debt

Explanation:

Debt comes with an obligation to pay interest at fixed regular intervals. Company need to pay interest interest even if there is insufficient or adequate profits. Even interest payments are tax deductible so this might boost Cash flows. They will receive full amount at the time of maturity.

where as under equity, company has no obligation to pay dividends to shareholders. Shareholders expect higher returns because they are taking additional risk as they are not certain about their returns. Even at the time of liquidation shareholders are paid only after payment to the debt holders. So, shareholders take more risk than debt holders. If company does not perform well the stock price falls down and this will reduce the wealth of the stockholders unlike debt holders as they receive full consideration irrespective of stock price.

Due to all these reasons, It is considered that Equity is more riskier than Debt

jeff jeffy answered 1 year ago

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