higher
lower
equal
medium
Answer is Right!
Answer is Wrong!
The correct answer is: B. lower
The effective cost of debentures is lower than the effective cost of shares. This is because debentures are a form of debt, while shares are a form of equity. Debtholders have a prior claim on the company’s assets than shareholders, so they are less risky. This means that debentures can be issued at a lower interest rate than shares.
In addition, debentures are typically repaid over a fixed period of time, while shares do not have a fixed maturity date. This means that debentureholders have a better idea of when they will get their money back, which makes them less risky.
As a result of these factors, debentures are a lower-cost form of financing than shares.
Here is a brief explanation of each option:
- Option A: higher. This is incorrect because debentures are a lower-cost form of financing than shares.
- Option B: lower. This is the correct answer because debentures are a lower-cost form of financing than shares.
- Option C: equal. This is incorrect because debentures are a lower-cost form of financing than shares.
- Option D: medium. This is incorrect because debentures are a lower-cost form of financing than shares.