A company needs to raise $9 million and issues bonds for that amount rather than additional capital stock. Which of the following is not a likely reason the company chose debt financing? A. Management hopes to increase profits by using financial leveraging. B. The cost of borrowing is reduced because interest expense is tax deductible. C. Adding new owners increases the possibility of bankruptcy if economic conditions get worse. D. If money becomes available,
A company needs to raise $9 million and issues bonds for that amount rather than additional capital stock. Which of the following is not a likely reason the company chose debt financing? A. Management hopes to increase profits by using financial leveraging. B. The cost of borrowing is reduced because interest expense is tax deductible. C. Adding new owners increases the possibility of bankruptcy if economic conditions get worse. D. If money becomes available,
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
A company needs to raise $9 million and issues bonds for that amount rather than additional capital stock. Which of the following is not a likely reason the company chose debt financing?
A. Management hopes to increase profits by using financial leveraging.
B. The cost of borrowing is reduced because interest expense is tax deductible.
C. Adding new owners increases the possibility of bankruptcy if economic conditions get worse.
D. If money becomes available, the company can rid itself of debts.
Expert Solution
Step 1
Equity shares are having residual claim on the company at the time of liquidation because equity shares will be paid last and they do not exposed the company to any kind of insolvency.
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