BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A company does not have to share ownership of the company
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Interest paid is exempted from tax, while dividends paid on equity are not
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A company can offer voting right to the investors
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Interest paid to the bondholders are tax deductible and therefore is a cheaper source of capital
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Detailed explanation-1: -Many fast-growing companies would prefer to use debt to support their growth, rather than equity, because it is, arguably, a less expensive form of financing (i.e., the rate of growth of the business’s equity value is greater than the debt’s borrowing cost).
Detailed explanation-2: -One advantage of debt financing is that it allows a business to leverage a small amount of money into a much larger sum, enabling more rapid growth than might otherwise be possible. Another advantage is that the payments on the debt are generally tax-deductible.
Detailed explanation-3: -The main reason that companies choose to finance through debt rather than equity is to preserve company ownership. In equity financing, such as selling common and preferred shares, the investor retains an equity position in the business.
Detailed explanation-4: -Why is too much equity expensive? The Cost of Equity is generally higher than the Cost of Debt since equity investors take on more risk when purchasing a company’s stock as opposed to a company’s bond.