Why Might a Company Choose to Increase Its Debt Rather

question 24

Multiple Choice

Why might a company choose to increase its debt rather than issue stock?

• A) to limit the potential rate of return to owners
• B) to require owners to give up some voting control
• C) to reduce financial risk
• D) to retain full ownership and control

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Definitions:

Cash Inflows

The total amount of money being received by a company during a specific period, from activities like sales, financing, and investments.

Required Rate

Often referred to as the required rate of return, it is the minimum return an investor expects to achieve by investing in a particular asset, considering its risk level.

Working Capital

A measure of a company's short-term financial health and operational efficiency, calculated as current assets minus current liabilities.

Net Present Value

A financial metric used to assess the profitability of an investment, calculating the difference between the present value of cash inflows and outflows over a period.