Question
Business Studies Question on Business Finance
Debt is____cheaper, but more__risky for a business because the payment of interest and the return of principal is obligatory for the business.
A
Cheaper, risky
B
Cheaper, safe
C
Expensive, risky
D
Expensive, safe
Answer
Cheaper, risky
Explanation
Solution
Debt is generally cheaper than equity because interest payments are tax-deductible, but it is riskier due to the obligatory repayment of interest and principal regardless of the business’s financial situation.