Lesedi Is Trying to Decide Between the Use of Debt

question 109

Multiple Choice

Lesedi is trying to decide between the use of debt and the use of equity to finance her young business.She should remember that:

• A)her return on assets will be less if she uses debt financing.
• B)using other people's money to finance one's business is seldom a good idea.
• C)the lender will have partial control of the business.
• D)debt must be repaid even if the company does not make a profit.

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Definitions:

Neutral Taxes

Taxes that do not affect the allocation of resources between different goods or activities in the economy.

Excess Burdens

The economic inefficiencies or losses that result from imposing taxes or government policies.

Principle of Second Best

An economic theory that suggests when a condition for a perfect market cannot be met, the next-best solution may involve violating another condition to improve efficiency.

Distortionary Tax

A tax that causes people to alter their behavior and make different economic decisions than they would in a free market, potentially leading to inefficiency.