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:

Vocational School

An educational institution that provides practical and skills-based training aimed at preparing students for specific trades, professions, or careers.

Budgets

Financial plans that estimate revenue and expenditures over a specific period, helping organizations plan their finances.

Standard Costs

Predetermined costs for materials, labor, and overhead used for budgeting and assessing performance.

Variable Overhead

Costs that vary with the level of production output, such as utilities and commissions.