Which Three of the Following Are Reasons Why Financing a Business

question 11

Multiple Choice

Which three of the following are reasons why financing a business through borrowing is cheaper than using equity?

• A) Issuing and transaction costs associated with raising and servicing debt are generally less than for ordinary shares.
• B) Debt financial securities present lower costs than shares because they have prior claims on annual income and in liquidation.
• C) Lenders require a lower rate of return than ordinary shareholders.
• D) Debt interest can be offset against pre- tax profits before calculating the corporation tax bill, thus reducing the tax paid.

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Definitions:

Arousal

A physiological and psychological state of being awake or reactive to stimuli, often involving heightened physical and mental alertness.

Visual Cliff

An experimental apparatus designed to give the illusion of a dangerous drop-off, used to study depth perception and fear of heights in infants.

Ambiguous

Open to more than one interpretation or having a double meaning.

External Locus

A belief that one's life events are largely influenced by external forces or the environment, as opposed to internal factors (contrast with internal locus of control).