Which of the following is a disadvantage of financing with debt? It dilutes the ownership of...

Which of the following is a disadvantage of financing with debt?

It dilutes the ownership of a company.
It reduces financial leverage.
It carries the risk of bankruptcy.
Interest expense increases tax liability.

Expert Solution

The disadvantage of debt financing is it has the risk of bankruptcy. The higher the use of financing with debt, the more there is risk of becoming bankrupt. Thus the higher the debt-equity ratio of a company, the more it is risky to investors and lenders. So a company is advised to limit their amount of debt otherwise it may lead to bankruptcy.

Thus correct option is the third one.

ekkarill92 answered 2 years ago

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