Question

Which one of the following best describes the use of debt financing? a)Debt financing initially reduces the cost of capital for a firm. b)A firm financed with 100% debt has the optimal capital structure. c)As debt financing decreases, the risk level of the firm increases. d)Bondholders require the same rate of return regardless of the amount of debt held by a firm.

Answer 1

Debt financing helps firms maintain control without shareholder intervention but requires scheduled interest payments. Large firms prefer bonds for financial capital, whereas small firms may opt for customized bank loans.

Step-by-step explanation:

The best description of the use of debt financing is that it allows firms to maintain control of their operations by not being subject to shareholders, as opposed to issuing stock, which involves selling company ownership to the public. Debt financing involves committing to scheduled interest payments through bank loans or bonds, which can be a disadvantage if the firm does not have sufficient income. Large firms often issue bonds to raise financial capital for investments or acquisitions, while smaller firms might prefer bank loans that are more customized and enable closer monitoring.