When a Company Needs Funds to Finance the Expansion of Its

question 29

Multiple Choice

When a company needs funds to finance the expansion of its operations, which of the following is not an advantage of issuing bonds rather than issuing stock?

• A)Stockholders remain in control as bondholders cannot vote or share in the company's earnings.
• B)Interest expense is tax deductible but dividends are not.
• C)Bonds can usually be issued at a low interest rate and the proceeds can be invested to earn a higher rate.
• D)The dates for the interest and maturity payments are fixeD.The fixed payment dates create inflexibility and therefore increase bankruptcy risk.

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Definitions:

Incremental Cash Flows

The additional cash flow a business receives from taking on a new project, used to analyze the profitability of that project.

Investment Requirement

The total capital and resources needed for a project, investment, or venture to proceed.

Time Value

The concept that money available today is worth more than the same amount in the future due to its potential earning capacity.

Payback Period

The time it takes for an investment to generate income or revenue equal to its cost, used to assess the feasibility or risk of an investment.