Question:

Debt is__cheaper, but morerisky for a business because the payment of interest and the return of principal is obligatory for the business.

Updated On: Oct 28, 2024

Cheaper, risky
Cheaper, safe
Expensive, risky
Expensive, safe

Hide Solution

Verified By Collegedunia

The Correct Option is A

Solution and Explanation

Debt is generally cheaper than equity because interest payments are tax-deductible, but it is riskier due to the obligatory repayment of interest and principal regardless of the business’s financial situation.

Was this answer helpful?

Top Questions on Business Finance

Match List-I with List-II.

List-I (Characteristic)	List-II (Concept)
(A) More debt can be used if debt can be raised at a lower rate	(I) Cost of debt
(B) Since interest is a deductible expense, cost of debt is affected by the tax rate	(II) Risk Consideration
(C) If a firm’s business risk is lower, its capacity to use debt is higher and vice-versa	(III) Tax Rate
(D) A public issue of equity may reduce the management’s holding in the company	(IV) Control

Debt is____cheaper, but more__risky for a business because the payment of interest and the return of principal is obligatory for the business.

The Correct Option is A

Solution and Explanation

Top Questions on Business Finance

Questions Asked in CUET exam

Debt is__cheaper, but morerisky for a business because the payment of interest and the return of principal is obligatory for the business.