Question

Heavy use of long-term debt can be of benefit to a firm to help expand, although it adds to the firm's overall level of risk.

A. True
B. False.

Answer 1

A

Step-by-step explanation:

Long term debt is debt that has a maturity that is longer than a year.

The higher the use of debt, the higher the risk a firm takes on. This is because the greater the use of debt, the higher the chances of the firm defaulting on debt.

firms that use a high amount of debt, have an higher beta. As a result of the higher beta, the required return is also higher.

use of long-term debt provides firms with the necessary cash flows that would be needed to carry out necessary projects. Thus, it benefits a firm by helping it expand