Which one of these statements is correct?
A)There is no condition known to date whereby a corporation can increase firm value through the use of leverage.
B)Corporations generally pay a lower cost on debt than do individuals due to their vast pool of liquid assets.
C)If individuals pay a higher cost to borrow than corporations do,then corporations can increase firm value by borrowing.
D)Margin accounts tend to be high interest rate sources of funds for individuals.
E)Corporations can increase firm value by borrowing provided their interest rate on debt exceeds that paid by individuals.

Question

Quizplus · Accepted Answer

If individuals pay a higher cost to borrow than corporations do, then corporations can increase firm value by borrowing. This is because corporations can use the borrowed funds to invest in projects that generate returns higher than the cost of borrowing.

Which One of These Statements Is Correct