Debt is not a free resource because
A)The use of debt funds is restricted as designated by the debt instrument.
B)Companies must pay interest on the borrowings.
C)Companies must restrict cash flow until the debt is repaid.
D)None of these ans choices are correct.

Question

Quizplus · Accepted Answer

Debt comes with an interest cost that has to be paid regularly by the borrower. Hence, debt is not a free resource. Choice A is only a partial explanation as the restrictions on the use of funds are designed to protect the interest of lenders and ensure timely repayment of debt. Choice C is also only a partial explanation as companies may have to sacrifice some cash flow to service the debt, but they can also generate new cash flows using the borrowed funds for profitable investments.

Debt Is Not a Free Resource Because