The cost of capital of a long term debt is generally.
A. Lower than the owned funds
B. Equal to that of owned funds
C. More or less than owned funds
D. Higher than that of owned funds
Answer: Option D
Solution(By Examveda Team)
The cost of capital of a long term debt is generally Higher than that of owned funds. Cost of capital refers to the opportunity cost of making a specific investment. It is the rate of return that could have been earned by putting the same money into a different investment with equal risk.This Question Belongs to Commerce >> Financial Management
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Comments ( 4 )
Investment is the _______________.
A. net additions made to the nation’s capital stocks
B. person’s commitment to buy a flat or house
C. employment of funds on assets to earn returns
D. employment of funds on goods and services that are used in production process
Financial Management is mainly concerned with ______________.
A. All aspects of acquiring and utilizing financial resources for firms activities
B. Arrangement of funds
C. Efficient Management of every business
D. Profit maximization
The primary goal of the financial management is ____________.
A. to maximize the return
B. to minimize the risk
C. to maximize the wealth of owners
D. to maximize profit
In his traditional role the finance manager is responsible for ___________.
A. proper utilisation of funds
B. arrangement of financial resources
C. acquiring capital assets of the organization
D. efficient management of capital
Well, the answer is that cost of debt is cheaper than cost of equity. As debt is less risky than equity, the required return needed to compensate the debt investors is less than the required return needed to compensate the equity investors. HENCE, The cost of capital of a long term debt is generally Lower than the owned funds
I think answer A is correct because they are treated as operating expenses and deducted before tax. So they are less costly as compared to the equity or owned funds.
I feel answer 'A' is correct, because shareholders investing in the company will expect a return that is prevailing in the equity market which is always higher than the interest rate of loans. Also bank loan is tax deductible so it will be cheaper compared to equity. same an be seen while calculating the cost of capital of any company through CAPM model.
I think cost of debt is lower than owned fund.as interest is deductible expense while charging tax.and rate of interest is generally lower than the rate of dividend.. I believed Option A is correct