Question

Match List-I with List-II.

List-I (Characteristic)	List-II (Concept)
(A) More debt can be used if debt can be raised at a lower rate	(I) Cost of debt
(B) Since interest is a deductible expense, cost of debt is affected by the tax rate	(II) Risk Consideration
(C) If a firm’s business risk is lower, its capacity to use debt is higher and vice-versa	(III) Tax Rate
(D) A public issue of equity may reduce the management’s holding in the company	(IV) Control

Choose the correct answer from the options given below :

• A. (A)-(I), (B)-(III), (C)-(III), (D)-(IV)
• B. (A)-(I), (B)-(III), (C)-(II), (D)-(IV)
• C. (A)-(I), (B)-(II), (C)-(IV), (D)-(III)
• D. (A)-(III), (B)-(IV), (C)-(I), (D)-(II)

Answer 1

The Correct Option is B

To establish the correspondence between List-I (Characteristics) and List-II (Concepts), an examination of each characteristic is conducted:

1. Increased debt utilization is feasible when borrowing costs are reduced (A): This attribute pertains to the impact of the expense of acquiring debt on the decision to increase debt levels. Consequently, it aligns with Cost of debt (I).
2. The tax rate influences the effective cost of debt because interest is a tax-deductible expense (B): Tax savings realized from interest payments reduce the net cost of debt, linking this characteristic to Tax Rate (III).
3. A firm with lower business risk possesses a greater capacity for debt, and conversely (C): This concerns a company's ability to manage debt relative to its risk profile, matching it with Risk Consideration (II).
4. A public issuance of equity can diminish the proportion of the company held by management (D): The introduction of new equity can dilute existing ownership stakes, thereby affecting managerial control, and thus corresponds to Control (IV).

The definitive matching of characteristics to concepts is as follows: (A)-(I), (B)-(III), (C)-(II), (D)-(IV).