Generating Capital by Means of Debt Financing

question 170

Multiple Choice

Generating capital by means of debt financing:

• A) Involves borrowing money, either from a bank loan or from the use of corporate bonds.
• B) Means that the firm borrowing the money will have to pay interest charges.
• C) May be worth it if the borrowed money is used to implement a marketing plan that earns a return greater than the cost of borrowing the money.
• D) Means that the firm will have to put up some of its assets as a loan guarantee.
• E) All of these.

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Definitions:

Accounting Profits

The total revenue of a business minus the explicit costs, reported on financial statements according to standard accounting practices.

Economic Profits

The disparity between total income and combined expenses, encompassing both out-of-pocket and hidden costs.

Economic Profits

The margin between an organization's complete earnings and its aggregate expenditures, covering both visible and hidden costs.

Implicit Costs

Implicit costs are the opportunity costs of using resources owned by the business for production instead of lending, selling, or renting them out.