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.

---

Definitions:

Bankruptcy Code

The set of laws that govern bankruptcy proceedings in the United States, found in Title 11 of the United States Code.

2005 Bankruptcy Reform Act

Legislation officially known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, designed to overhaul U.S. bankruptcy law by adding means testing to discourage Chapter 7 filings and to reduce bankruptcy fraud.

Federal District

A division within a country, distinct from the states or provinces, that usually encompasses the nation's capital city and has different governing laws.

Economic Downturn

A period of reduced economic activity characterized by declining GDP, increased unemployment, and lower consumer spending.