Question

The common stock of a company must provide a higher expected return than the debt of the same company because

Answer 1

there is less demand for stock than for bonds. there is greater demand for stock than for bonds. there is more systematic risk involved for the common stock.

Answer 2

Explanation:

Unlike equity, debt must at some point be repaid.

Interest is a fixed cost which raises the company's break-even point. High interest costs during difficult financial periods can increase the risk of insolvency.

The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors.