Question

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

Choose the correct answer from the options given below :

• A. (A)-(I), (B)-(III), (C)-(III), (D)-(IV)
• B. (A)-(I), (B)-(III), (C)-(II), (D)-(IV)
• C. (A)-(I), (B)-(II), (C)-(IV), (D)-(III)
• D. (A)-(III), (B)-(IV), (C)-(I), (D)-(II)

Answer 1

The Correct Option is B

To understand the matching between List-I (Characteristics) and List-II (Concepts), let's analyze each characteristic: 

1. More debt can be used if debt can be raised at a lower rate (A): This characteristic relates to how the cost of borrowing (debt) affects the decision to take on more debt. Therefore, it matches with Cost of debt (I).
2. Since interest is a deductible expense, cost of debt is affected by the tax rate (B): The tax rate lowers the effective cost of debt due to tax savings on interest payments, relating this characteristic to Tax Rate (III).
3. If a firm’s business risk is lower, its capacity to use debt is higher and vice-versa (C): This relates to the firm's ability to handle debt based on its risk profile, matching it with Risk Consideration (II).
4. A public issue of equity may reduce the management’s holding in the company (D): Issuing new equity can dilute existing ownership, affecting control over the company, thus matching it with Control (IV).

Therefore, the correct matching of characteristics with the concepts is: (A)-(I), (B)-(III), (C)-(II), (D)-(IV).

Answer 2

Here is the correct matching of the statements:

(A)-(I): More debt can be used if debt is raised at a lower rate, which relates to the cost of debt. This suggests that debt becomes more attractive when it is cheaper, allowing companies to take on more debt.

(B)-(III): The effect of tax rate on interest deductibility ties to the tax rate concept. Interest paid on debt can often be deducted from taxes, and this impact is influenced by the applicable tax rate.

(C)-(II): The business risk and debt capacity relate to risk considerations. Companies with higher business risk may have less capacity to take on debt, as debt increases financial risk.

(D)-(IV): A public issue of equity reducing the management’s holding in the company reflects control. When a company issues more equity, management may lose control if their stake in the company is diluted.

This pairing provides a clearer understanding of financial and business concepts in the context of debt, tax rates, business risk, and control.