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

(A)-(I): More debt can be used if debt is raised at a lower rate, which relates to the cost of
debt.
(B)-(III): The effect of tax rate on interest deductibility ties to the tax rate concept.
(C)-(II): The business risk and debt capacity relate to risk considerations.
(D)-(IV): A public issue of equity reducing the management’s holding in the company
reflects control.