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

question 77

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, rs, than on the interest rate on long-term debt, rd, 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:

Josip Broz

Better known as Tito, was the communist leader of Yugoslavia from the end of World War II until his death in 1980, recognized for his independent policies.

Anti-Nazi Partisans

Resistance fighters who actively opposed and fought against the Nazi regime during World War II.

Tito

Josip Broz Tito, a Yugoslav communist revolutionary and political leader who served as Prime Minister (1944–1963) and later President (1953–1980) of the Socialist Federal Republic of Yugoslavia.

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The Allied invasion of Normandy, France, on June 6, 1944, which was a pivotal moment in World War II leading to the liberation of Western Europe from Nazi control.