Debt financing is made up of explicit and implicit costs that refer to:

Question

Quizplus · Accepted Answer

Debt financing includes both explicit costs, such as the interest rate demanded by bondholders, and implicit costs, such as the higher required return on equity due to the increased financial risk associated with the use of debt. Therefore, option B is the correct answer. Option A is incorrect because it implies that the interest rate demanded by bondholders is the only cost associated with debt financing. Option C is incorrect because it suggests that debt financing only incurs a cost for equity holders. Option D is incorrect because it implies that the costs associated with issuing bonds are the only costs associated with debt financing.

Debt Financing Is Made Up of Explicit and Implicit Costs