Debt financing is made up of explicit and implicit costs which are:

Question

Quizplus · Accepted Answer

Debt financing involves both explicit costs such as the interest rate that bondholders demand, as well as implicit costs, including the higher required ROE for shareholders due to the increased risk associated with taking on debt. Therefore, the most accurate answer is B, with the order of costs reversed in option A. Option C incorrectly suggests that the costs of both equity and debt are implicit, while option D focuses solely on the costs associated with issuing bonds.

Debt Financing Is Made Up of Explicit and Implicit Costs