Investors react positively to an increase in a firm's level of debt because they expect the?

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28-07-2022
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Investors react positively to an increase in a firm's level of debt because they expect the?

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Tutorconsortium338 Tutorconsortium338 · Answer 1 · 2022-08-04T15:29:41+02:00

Investors react positively to an increase in a firm's level of debt because they expect the "Value of the firm to increase firm to generate tax savings."

This is because Debt is often cheaper than equity, and interest payments are tax-deductible. So, as the level of debt increases, returns to equity owners also increase — enhancing the company's value. If risk weren't a factor, then the more debt a business has, the greater its value would be

How does increase in debt affect share price?

Risk increases, in part, because the debt could make it harder for the company to pay its obligation to bondholders. Therefore, under a typical scenario, stock prices will be less affected than bonds when a company borrows money.

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