Debt serves as a financial tool for companies to finance operations or expansion. It is generally more economical than equity financing due to the tax deductibility of interest, which reduces its cost. Nevertheless, debt carries higher risk as it necessitates the company's commitment to repay interest and the principal according to the agreed timeline. Failure to meet these commitments can result in significant financial repercussions, such as bankruptcy.
| Debt Characteristics | Rationale |
|---|---|
| Cost-effective | Interest expenses are tax-deductible |
| High Risk | Repayment obligations can cause financial instability |
Considering the provided choices, the accurate response is "Cost-effective, high risk".