Which of the following statements is NOT true?

The cost of debt is higher than cost of equity

The correct answer is option 1- The cost of debt is higher than cost of equity.

The cost of debt is higher than cost of equity is not true.

• The cost of debt is higher than cost of equity- This is not true. Typically, the cost of debt is lower than the cost of equity because debt holders take on less risk than equity shareholders. Therefore, this statement is inaccurate.

• The lender’s risk is lower then equity shareholder’s risk. This is true. The cost of debt is lower than the cost of equity for a firm because the lender’s risk is lower than the equity shareholder’s risk, since the lender earns an assured return and repayment of capital and, therefore, they should require a lower rate of return.

• The interest paid on debt is treated as a tax deductible expense. This is true. Interest paid on debt is charge against profit so it is tax deductible expense.