Series 79 practice questioneasyDebt vs Equity Trade-offs
Which of the following is a disadvantage of increasing leverage in a company’s capital structure?
- AHigher risk of financial distress or default during economic downturns✓ Correct answer
- BImmediate dilution of current equity holders’ ownership
- CIncreased flexibility for future equity issuances
- DLower interest expense over time
Explanation
Why A — Higher risk of financial distress or default during economic downturns
Higher leverage increases default risk, especially during downturns. Debt does not cause immediate dilution, and it typically reduces rather than increases future flexibility. Interest expense rises—not falls—as leverage increases.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 995+ Series 79 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Collection, Analysis & Evaluation of Data questions
- A company issues new equity to retire $10 million of outstanding debt. Which of the following is the most likely…
- In theory, what is the primary goal of determining a company's optimal capital structure?
- Which of the following is typically used as the risk-free rate in the calculation of the cost of equity?
- Which of the following changes would most likely cause a company’s WACC to decrease, all else equal?
- A company has $20 million in total debt and $80 million in equity. What is its debt-to-equity ratio?
- An investment banker is advising a manufacturing company that currently has no debt but is considering issuing bonds to…
- Which of the following statements is true regarding the impact of a higher proportion of debt in a company’s capital…
- A banker observes that strategic buyers in the software sector are consistently paying higher EV/EBITDA multiples than…