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Long Term Securities

?

All of the following are advantages of debt financing except

Interest is tax deductible.
The use of debt will assist in lowering the firm’s cost of
capital.
In periods of inflation, debt is paid back with dollars
that are worth less than the ones borrowed.
The acquisition of debt decreases stockholders’ risk.

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

(d) The requirement is to identify the advantages/
disadvantages of debt versus equity financing. Answer (d) is
correct because debt actually increases stockholders’ risk because
the financial leverage of the firm is higher. Answers (a), (b),
and (c) are incorrect because they are all advantages of debt financing.

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