Series 79 practice questioneasyCapital Structure Impact
Which of the following statements is true regarding the impact of a higher proportion of debt in a company’s capital structure?
- AThe company’s equity beta will always decrease.
- BThe company’s interest coverage ratio may decline.✓ Correct answer
- CThe company’s financial risk will decrease.
- DThe company will be less sensitive to changes in interest rates.
Explanation
Why B — The company’s interest coverage ratio may decline.
Higher debt increases interest expense, potentially lowering interest coverage. Equity beta may increase with leverage, financial risk rises, and the company becomes more, not less, sensitive to interest rates.
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