Question

1. Companies may prefer to raise capital from debt financing instead of equity financing because:

1. Equity financing generates more capital than debt financing
2. Equity financing increases the company’s EPS
3. Debt financing does not affect the company’s EPS as much as equity financing
4. Debt financing increases the company’s interest expense

2. Treasury stock is

A) shares owned by the directors of a company.

B) shares owned by the management of a company.

C) shares that are not yet sold but could be sold at any time by a company.

D) previously issued shares of a company that are now held for resale by the company.

E) shares of a company held in reserve to eventually retire the debt of the company.

3. A company may choose to purchase its own stock from the stock market (i.e., Treasury Stock) for which of the following reasons?  

a.          to manipulate the company’s earnings-per-share

b.         to ensure that shares of stock are available as employee compensation

c.          to avoid a hostile takeover by another company

d.         all of the above are reasons why a company would purchase its own stock

Answer 1

1)

The correct option is d. Debt financing increases the company’s interest expense

Debt is the amount acquired through loan and which is to be repaid on later date.

Interest paid on debt are generally tax deductible. Hence there is a benefit of tax on Interest payment of debt.

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