There Are Two Costs of Debt Finance

question 63

True/False

There are two costs of debt finance.The explicit cost of debt is the rate of interest that bondholders demand.But there is also an implicit cost,because higher levels of debt increase the required rate of return to equity.

---

Definitions:

Economic Profits

The difference between the total revenue earned by a firm and the total costs of production, including opportunity costs.

Market Demand Curve

A graphical representation showing the total demand of all consumers in a market for a particular product at different prices.

Colluded

A situation where firms in a market agree to set prices or output levels to maximize collective profits, often at the expense of competition.

Marginal Cost

The financial implication of creating an extra unit of a product or service.