Which of the following is true about debt financing Question

Which of the following is true about debt financing?

Question 6 options:

Contractual claim on a firm’s cash flows and assets

Has a fixed life

Priority claim on cash flows in both operating periods and bankruptcy.

All of the above

Solution

All the above statements about debt are true. So Option D is the answer.

Debt holders generally hold the first right over the firm\'s cash flows (income) and assets. This implies, they are first paid their promised amount (interest payments) before payments to either preferred or common equity holders. Even in case of a bankruptcy or default, debt holders will always get first priority in getting the value generated from liquidation of company\'s assets. So option A and C are correct.

Debt generally has a fixed life unlike preferred or common equity which are generally perpetual (or very long term) in nature. Hence statement B is true.