[amp_mcq option1=”Lower than the owned funds” option2=”Equal to that of owned funds” option3=”More or less than owned funds” option4=”Higher than that of owned funds” correct=”option4″]
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.