Series 79 practice questionmediumCapital Structure and Credit Rating
A company is considering issuing additional debt. Which of the following is the most likely risk associated with this action?
- AA downgrade in the company’s credit rating, increasing future borrowing costs✓ Correct answer
- BDecreasing financial risk but increasing operating risk
- CImprovement in equity holders’ claim on assets
- DAn automatic increase in the company’s stock price
Explanation
Why A — A downgrade in the company’s credit rating, increasing future borrowing costs
Issuing more debt can trigger a credit downgrade, raising future borrowing costs. Financial, not operating, risk rises; equity claims are subordinated by new debt, and stock price movements are not guaranteed.
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