Which of the Following Is NOT a Cost to the Firm

question 50

Multiple Choice

Which of the following is NOT a cost to the firm of increasing debt financing?

• A)investors will demand a higher interest rate on debt.
• B)the risk to common stockholders increases.
• C)stockholders will demand a higher return.
• D)the cost of common equity will decrease.

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Definitions:

Net Sales

The net sales revenue of a company, calculated after deducting returns, allowances for damage or loss, and any discounts.

Allowance Method

The allowance method is an accounting approach that estimates and reports bad debts as an expense and accounts for receivables that are not expected to be collected.

Bad Debts Expense

The cost associated with accounts receivable that a company does not expect to collect because customers default on payments.

Direct Write-off Method

A method where uncollectible accounts receivable are written off directly against income at the time they are deemed to be uncollectible.