debt risk

问题如下：

In computing WACC, the cost of equity is higher than the cost of debt because the:

选项：

A.

cost of debt is set by management.

B.

distributions to shareholders are tax deductible

C.

debt investors take less risk than equity investors

解释：

C is correct. Debt is less risky than equity because it has a priority, contractual claim on the firm’s cash flow. Additionally, some debt is secured with an underlying asset. In contrast, equity is a residual claim.

A is incorrect because an issuer’s cost of debt, like its cost of equity, is determined by financial market participants.

B is incorrect because, generally, distributions to shareholders, such as dividends, are not tax deductible while interest expense is tax deductible in many jurisdictions.