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A company's Board of Directors is assessing the likely impact of financing future new projects using either equity or debt.
The directors are uncertain of the effects on key variables.
Which THREE of the following statements are true?
Suggested Answer: D, E, F
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16 comments · newest first
TO
Tomas
2 months ago
F seems true. More equity can lead to higher dividend expectations.
RA
Raina
2 months ago
C is definitely not true. Debt isn't always better than equity.
JI
Jina
2 months ago
I feel B is incorrect. Retained earnings do have an opportunity cost.
SH
Sharita
2 months ago
Yes, D makes sense. Higher debt means higher risk for equity holders.
CA
Carlota
3 months ago
I believe D is true. More debt raises equity cost due to risk.
JO
Joaquin
3 months ago
Agreed, A is misleading. Taxes are impacted by financing choice.
EV
Eva
3 months ago
I think A is false. Debt affects tax due to interest deductions.
LE
Leota
3 months ago
B) no cost for retained earnings? Sounds too good to be true!
ST
Stephane
3 months ago
F) totally agree, equity brings dividend pressure.
NO
Noble
4 months ago
C) really? Debt isn't always better!
LE
Leonie
5 months ago
D) is true, debt does raise equity costs.
TR
Tran
5 months ago
A) is definitely false, tax impacts are real.
IN
Ines
6 months ago
D makes sense to me because if a company takes on more debt, it can increase the risk for equity holders, leading to a higher cost of equity.
WA
Wava
6 months ago
C sounds too absolute; I recall that debt isn't always preferable due to risks involved.
WY
Wynell
6 months ago
I’m not sure about B; I thought retained earnings do have an opportunity cost associated with them.
KA
Kathrine
6 months ago
I remember studying that debt can actually affect tax liabilities, so A seems incorrect.