The correct answer is D. All of the above.
Debt financing is a type of financing that involves borrowing money from a lender. The lender will charge interest on the loan, which must be repaid over time. Debt financing can be used to finance a variety of expenses, such as the purchase of assets, the expansion of a business, or the repayment of other debts.
There are several advantages to debt financing. First, interest payments are tax-deductible, which can lower a company’s tax liability. Second, debt financing can help to reduce a company’s weighted average cost of capital (WACC), which can make it more attractive to investors. Third, debt financing does not dilute the ownership control of the company’s shareholders.
However, there are also some disadvantages to debt financing. First, debt financing can be expensive, as lenders will charge interest on the loan. Second, debt financing can increase a company’s financial risk, as it must make regular payments on the loan. Third, debt financing can limit a company’s flexibility, as it may be required to obtain approval from the lender before making certain financial decisions.
Overall, debt financing can be a useful tool for businesses that need to raise capital. However, it is important to weigh the advantages and disadvantages of debt financing before deciding whether or not to use it.
Here are some additional details about each of the advantages of debt financing:
- Interest is tax-deductible: This means that businesses can deduct the interest they pay on their loans from their taxable income. This can lower a company’s tax liability and save them money.
- It reduces WACC: WACC is a measure of the cost of capital for a company. It is calculated by taking the weighted average of the cost of debt and the cost of equity. Debt financing can help to reduce WACC because the interest payments on debt are tax-deductible. This makes debt a cheaper source of capital than equity.
- Does not dilute owners control: When a company borrows money, it does not have to give up any ownership control. This is in contrast to equity financing, where the company must issue new shares of stock to raise capital. This can dilute the ownership control of the existing shareholders.