David Is Trying to Decide Whether to Add Capital Through

question 83

Multiple Choice

David is trying to decide whether to add capital through investing more of his own money or through borrowing money from the bank.To help him decide, you remind him that as long as his business's rate of return on its assets is greater than the cost of the debt, his rate of return on equity will _____ as the business uses more debt.

• A)decrease
• B)increase
• C)remain the same
• D)fluctuate

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Definitions:

Notes Payable

Written agreements where the borrower promises to pay back a specified sum of money plus interest to the lender at a future date.

Cash Flow

The total amount of money being transferred into and out of a business, affecting its liquidity and overall financial health.

Financing Activities

Actions leading to alterations in the size and composition of a company's equity capital or debt.

Cash Flow

The total amount of money being transferred into and out of a business, especially as affecting liquidity.