Why is risk associated with having more debt considered not necessarily bad?

The notion that having more debt is associated with risk does not automatically make it a negative situation for a firm. Finding the optimal level of debt is essential because it allows a company to balance the benefits of leverage against the risks involved.

When a firm utilizes debt, it can amplify its returns on equity when the cost of debt is lower than its return on investments. This leverage can provide a competitive advantage and enable further investments that might not be possible with equity financing alone, thus enhancing growth and market presence. However, too much debt can lead to financial distress and increased risk of bankruptcy.

Establishing the optimal level of debt means the firm is strategically assessing how much leverage to use while considering its cash flow, business risks, and industry norms. This careful assessment allows businesses to maximize shareholder value by optimizing their capital structure, which can lead to increased profitability and competitive strength.

While the other options might suggest beneficial outcomes related to debt, they do not encapsulate the nuanced understanding of risk management associated with finding the right balance in debt financing. For example, while leveraging might yield higher returns, it also carries greater risks that need to be managed.