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Why is the default risk higher (and debt/Investors are therefore requiring higher returns as a result)...

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Finance

Why is the default risk higher (and debt/Investors are thereforerequiring higher returns as a result) when I increase thedebt/equity Ratio? Thanks a lot in advance.

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3.7 Ratings (592 Votes)
Debt repayment has to be repaid first before any payment can be made to shareholders If debt increases then financial risk the risk that the company will default on payments is high As debt is increased in the capital structure initially it helps in lowering the cost of capital for the company as it replaces a costlier source of funds equity with a cheaper source It also provides tax savings However if debt is    See Answer
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Why is the default risk higher (and debt/Investors are thereforerequiring higher returns as a result) when I increase thedebt/equity Ratio? Thanks a lot in advance.

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