Introduction

Question 1

Why does risk increase with leverage?

Answer 1

Because the debt portion of the balance sheet is static, meaning changes in value impact only equity. The smaller the equity, the more dramatically it can be affected (in terms of relative changes).

Question 2

What is debt overhang?

Answer 2

A debt burden that is so large that an entity cannot take on additional debt to finance future projects, even those that are profitable enough to enable it to reduce its indebtedness over time