Which three of the following are reasons why financing a business through borrowing is cheaper than using equity?
A) Issuing and transaction costs associated with raising and servicing debt are generally less than for ordinary shares.
B) Debt financial securities present lower costs than shares because they have prior claims on annual income and in liquidation.
C) Lenders require a lower rate of return than ordinary shareholders.
D) Debt interest can be offset against pre- tax profits before calculating the corporation tax bill, thus reducing the tax paid.

Question

Quizplus · Accepted Answer

A) Borrowing often involves lower issuing and transaction costs compared to equity financing. C) Lenders typically accept a lower rate of return than equity investors because debt is less risky, given its priority in claims. D) Interest payments on debt reduce taxable income, which can lower the overall tax liability for a business, making debt financing more cost-effective.

Which Three of the Following Are Reasons Why Financing a Business