What Is the Risk in Using a Bank Overdraft as a Source

question 33

Multiple Choice

What is the risk in using a bank overdraft as a source of financing?

• A) The company's indebtedness will grow beyond its ability to handle it.
• B) Its cost exceeds that of the company's weighted average cost of capital.
• C) It will negatively impact the credit rating of the company.
• D) Interest costs cannot be deducted from income taxes.
• E) It may have to be paid in full with little prior notice.

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Definitions:

Bonds

A fixed-income investment representing a loan made by an investor to a borrower, typically corporate or governmental, which includes terms regarding interest payments and the return of principal at maturity.

Issue Price

The price at which new shares, bonds, or other securities are offered to the public or to existing shareholders for the first time.

Interest Payable

A liability account showing the amount of interest expense that has been incurred but not yet paid out in cash.