T/F 1. Financial markets connect production needs for money with consumption’s available savings. T/F 2. Money...

T/F 1. Financial markets connect production needs for money with consumption’s available savings.

T/F 2. Money markets deal in short-term debt.

T/F 3. Sunk costs have already been spent and are ignored.

T/F 4. Retained earnings are not a source of capital.

T/F 5 . The FED usually lowers interest rates if there is a fear of inflation.

Explain why the cost of debt is lower than the cost of capital?

Solutions

Expert Solution

1.True

Financial markets connect production needs for money with consumptions with available savings.

Financial Markets is the market, an arrangement or institution where the traders are involved in the buying and selling of the financial assets like shares, bonds, derivatives, commodities, currencies, etc. It facilitates the exchange of financial instruments and financial. securities

2.True

The money market refers to trading in very short-term debt investments. At the wholesale level, it involves large-volume trades between institutions and traders.

3.True

A sunk cost is a cost that has already occurred and cannot be recovered by any means. Sunk costs are independent of any event and should not be considered when making investment or project decisions

4.False

Retainedearnings (RE) is the amount of net income left over for the business after it has paid out dividends to its shareholders. A business generates earnings that can be positive (profits) or negative (losses).

5.False

In general, as interest rates are reduced, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase.On the other hand, lowering interest rates also tend to increase inflation

cost of debt is essentially finite (you have no obligations once it’s paid off), it’ll generally be cheaper than equity for companies that expect to perform well. In other words, the more you expect to profit, the most costly sacrificing equity will be and the more beneficial it will be to simply keep the profits to yourself and pay interest on a loan. Therefore cost of debt is lower than the cost of equity.

ekkarill92 answered 1 year ago

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