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A firm that issues bonds with a higher coupon than its competitors is most likely to have:
AHigher credit risk
BLower credit risk
CHigher Equity
DLower D/E ratio
Answer & Solution
Correct answer: A. Higher credit risk
1. Higher coupons compensate investors for higher perceived risk.
2. Indicates higher default/credit risk.
3. Also implies higher Kd for the firm.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §1_