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:

Cytokinesis

Division of the cytoplasm following mitosis or meiosis.

Mitosis

A process of cell division that results in two genetically identical daughter cells from a single parent cell.

Apoptosis

A process of programmed cell death that occurs in multicellular organisms.

Proto-oncogene

A normal gene that can become an oncogene due to mutations or increased expression, leading to cancer development.