Lower than the owned funds
Equal to that of owned funds
More or less than owned funds
Higher than that of owned funds
Answer is Right!
Answer is Wrong!
The correct answer is: D. Higher than that of owned funds.
The cost of capital of a long term debt is generally higher than that of owned funds. This is because debt financing is a riskier form of financing for the company, as the lender has a legal claim on the company’s assets in the event of default. As a result, lenders require a higher return on their investment in the form of interest payments.
Owned funds, on the other hand, are not subject to the same risks as debt financing. As a result, shareholders are willing to accept a lower return on their investment.
Here is a brief explanation of each option:
- Option A: Lower than the owned funds. This is not generally the case, as debt financing is a riskier form of financing than owned funds.
- Option B: Equal to that of owned funds. This is also not generally the case, as debt financing is a riskier form of financing than owned funds.
- Option C: More or less than owned funds. This is possible, but it is not the general case. The cost of capital of a long term debt will generally be higher than that of owned funds.
- Option D: Higher than that of owned funds. This is the general case, as debt financing is a riskier form of financing than owned funds.