You are studying with some classmates and are reviewing each other’s responses to the following question:

“Explain whether investors would normally prefer companies that have a low level of leverage.”

Your classmate responds as follows:

“That’s right. Investors would normally view a low level of leverage as a positive thing. This would reduce the company’s exposure to changes in interest rates and would mean that there is little in the way of debt that would require repayment in future periods.”

Required

Evaluate your classmate’s response. Identify the elements that are correct and incorrect.