Why Have Firms Been Willing to Borrow Money in the Absence

question 122

Multiple Choice

Why have firms been willing to borrow money in the absence of having sufficient cash to pay dividends?

• A) Defaulting on dividends lowers credit ratings.
• B) Borrowing is cheaper than paying to omit dividends.
• C) Borrowing increases the firm's asset base.
• D) Dividend cuts often signal bad future performance.

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Definitions:

Bankruptcy Probabilities

Bankruptcy Probabilities represent the likelihood of a company or entity being unable to meet its financial obligations and thus having to declare bankruptcy.

Capital Structure

The mix of debt and equity financing a company uses to fund its operations and growth.

Tax Savings

The reduction in income tax obligation achieved through various deductions, credits, and exemptions.

Pre-merger WACC

The Weighted Average Cost of Capital for a company before undergoing a merger, representing its cost of funds.