23.5.B. Financing Decisions

Try these first

1. 1.

   What are the two main types of financing sources?

   Hint

   Think about how companies get money.

2. 2.

   What is financial leverage?

   Hint

   Focus on the relationship between debt and profit.

3. 3.

   Which of the following is a source of equity financing?

   • Bank loan
   • Venture capital
   • Bond

   Hint

   Think about how a company can gain investors.

4. 4.

   True or False: Financial leverage increases the potential for profit but also the risk of loss.

   • True
   • False

   Hint

   Consider the effect of debt on outcomes.

5. 5.

   A tech company is considering whether to raise funds through debt or equity to finance a new project. Analyze the risks and benefits of each option given their current financial state.

   Hint

   Consider current debt levels and market conditions.

6. 6.

   Calculate the cost of capital for a company planning to fund its operations using 60% debt at an interest rate of 5% and 40% equity with a required return of 10%. What would be the company’s weighted average cost of capital?

   Hint

   Use the formula for WACC considering the proportions of each financing method.