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:

Draw Key

A type of key, often made of metal, used to secure components together by fitting into a corresponding slot or recess, commonly found in mechanical and engineering applications.

Jam Nut

A type of thin nut used to lock another nut by being tightened against it, mainly in situations where vibration might loosen the nuts.

Kingpin

A central pivot in the steering mechanism of a vehicle, crucial for the steering system.

Snap Rings

Retaining rings inserted into a groove to hold components in assembly, often used in mechanical devices to secure parts in place.