The correct answer is D. Equity shareholders would demand higher return.
When a company increases its proportion of debt, it is taking on more risk. This is because debt holders have a first claim on the company’s assets in the event of bankruptcy. As a result, equity shareholders will demand a higher return to compensate them for this increased risk.
Option A is incorrect because the P.E. Ratio of a company is not affected by its debt-to-equity ratio. The P.E. Ratio is a measure of how much investors are willing to pay for a company’s stock, and it is based on a variety of factors, including the company’s earnings, growth prospects, and risk profile.
Option B is incorrect because the rate of return of a company is not affected by its debt-to-equity ratio. The rate of return is a measure of how much profit a company makes, and it is calculated by dividing the company’s net income by its assets.
Option C is incorrect because tax-shield is available on new debts. Tax-shield is the benefit that companies get from deducting interest payments from their taxable income. This benefit is available on all debts, regardless of their maturity.