Which of the following is not a primary motivation for a company financing its business activities through debt?
A)Trading on the equity
B)Reducing earnings variability
C)Tax deductibility of interest
D)Avoiding earnings dilution

Question

Quizplus · Accepted Answer

Reducing earnings variability is not a primary motivation for financing through debt. In fact, financing through debt can increase earnings variability due to the fixed interest payments that must be made regardless of the company's financial performance. The other options (A, C, D) are considered motivations for using debt financing: trading on the equity refers to the potential for higher returns on equity from using debt, tax deductibility of interest reduces the net cost of borrowing, and avoiding earnings dilution prevents the decrease in existing shareholders' percentage of ownership that can occur when new shares are issued.

Which of the Following Is Not a Primary Motivation for a Company