CUET Preparation Today
| In order to raise an additional capital of Rs 50 Crores, ABC Ltd Limited has used debt because: |
Increased use of debt lowers the overall cost of capital Increase in use of debt lowers overall financial risk Both 1 and 2 None of the above |
| 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. |
