In order to raise an additional capital of ₹50 Crores, ABC Ltd Limited has used debt because:
Answer & explanation
Correct answer: option 1
The correct answer is option 1- Increased use of debt lowers the overall cost of capital.
Increased use of debt lowers the overall cost of capital. The proportion of debt in the overall capital is also called financial leverage. Financial leverage is computed as D/E or D/(D+E) when D is the Debt and E is the Equity. As the financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases.