Which of the following statements concerning debt is correct?
A) As a company uses more debt, the risk to the company decreases.
B) Interest payment on debt must be paid only if the company has sufficient cash flow.
C) As debt increases, the fixed costs a company must pay increase.
D) Debt is frequently the costliest method of raising additional financing dollars.

Question

Quizplus · Accepted Answer

As a company takes on more debt, the fixed costs it must pay increases in the form of interest payments on the debt. This can lead to a higher break-even point for the company, making it more difficult to generate profits. Option A is incorrect because as a company uses more debt, the risk to the company actually increases since it has more financial obligations to meet. Option B is incorrect because interest payments on debt must be paid regardless of cash flow, and failure to do so can lead to default and potentially bankruptcy. Option D is also incorrect since debt is often a cheaper method of financing than equity, since interest payments on debt are tax-deductible.

Which of the Following Statements Concerning Debt Is Correct