If the Firm Decreases Its Debt Ratio,both the Debt and the Equity

question 104

True/False

If the firm decreases its debt ratio,both the debt and the equity will become riskier.The debtholders and equity holders require a higher return to compensate for the increased risk.

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Definitions:

Expected Rate of Return

The anticipated amount of profit or loss an investment is likely to generate, typically expressed as a percentage of the investment's initial cost.

R&D Expenditure

Refers to the funds allocated by a business or government for the purpose of researching and developing new products, processes, or services.

Added Profit

The additional profit gained from making changes to the production process or selling strategy, beyond the usual or expected profit levels.

Fast-Second Strategy

An approach by a dominant firm in which it allows other firms in its industry to bear the risk of innovation and then quickly becomes the second firm to offer any successful new product or adopt any improved production process.