If Investors' Aversion to Risk Rose, Causing the Slope of the SML

question 78

True/False

If investors' aversion to risk rose, causing the slope of the SML to increase, this would have a greater impact on the required rate of return on equity, r_s, than on the interest rate on long-term debt, r_d, for most firms.Other things held constant, this would lead to an increase in the use of debt and a decrease in the use of equity.However, other things would not stay constant if firms used a lot more debt, as that would increase the riskiness of both debt and equity and thus limit the shift toward debt.

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Definitions:

Rotational Shifts

A work schedule system where employees alternate their work hours across different times of the day or week, often to ensure 24/7 operation.

Biological Rhythm

A recurring cycle in the physiological processes of living organisms, which can include daily, tidal, weekly, seasonal, or annual rhythms.

Work Environment

The physical and psychological conditions under which employees work, including factors like safety, culture, and workspace layout.

Market Equilibrium

A situation in which the quantity of a good or service supplied is equal to the quantity demanded, leading to no pressure for price to change.