Which of the Following Is an Advantage of Debt Financing

question 8

Multiple Choice

Which of the following is an advantage of debt financing?

• A) Depending on the contract, a lender may claim on the owner's personal possessions
• B) If loan payments are not paid in time, a business can be forced to go bankrupt
• C) Debt payments reduce the cash available to the firm
• D) Managers can make financial plans well in advance

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Definitions:

Unsystematic Risk

The risk associated with a specific company or industry, which can be reduced through diversification.

Asset-specific Risk

Refers to the risk affecting an investment's value that is associated with the particular assets the investment owns, distinct from marketwide risks.

Specific Risk

The risk associated with a particular company or sector, which can be mitigated through diversification.

Market Risk Premium

Market Risk Premium is the additional return an investor expects from holding a risky market portfolio instead of risk-free assets.