[amp_mcq option1=”Trading on equity” option2=”Capital Gearing” option3=”Cost of Capital” option4=”Capital Budgeting ” correct=”option4″]<\/p>\n
The correct answer is (d). Capital budgeting is a process of planning and managing a company’s long-term investments. It involves identifying, evaluating, and selecting the best projects to invest in. Capital budgeting is not a technique of capital structure analysis. Capital structure analysis is the process of determining the optimal mix of debt and equity financing for a company. It involves assessing the risks and rewards of different financing options and choosing the mix that will maximize the company’s value.<\/p>\n
(a) Trading on equity is a technique of capital structure analysis that involves using debt financing to increase the return on equity. When a company borrows money, it has to pay interest on the loan. However, the interest expense is tax-deductible, which means that it reduces the company’s taxable income. This can result in a higher after-tax return on equity for the company.<\/p>\n
(b) Capital gearing is another term for leverage. Leverage is the use of debt financing to increase the potential return on equity. When a company borrows money, it increases its financial risk. However, it also increases its potential return on equity. This is because the interest expense on debt is tax-deductible, which can result in a higher after-tax return on equity.<\/p>\n
(c) Cost of capital is the rate of return that a company must earn on its investments in order to satisfy its investors. The cost of capital is a weighted average of the costs of debt and equity financing. The cost of debt is the interest rate that a company pays on its loans. The cost of equity is the rate of return that investors expect to earn on their investment in the company.<\/p>\n
I hope this helps! Please let me know if you have any other questions.<\/p>\n","protected":false},"excerpt":{"rendered":"
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