The cost of debt is lower than the costs of stocks. a. True b. False

True

Explanation:

The cost of debt is the rate of return that equates the price of the bond to the stream of future cash flows. Interest payable on debts are tax-deductible. It implies that businesses which use debt finance could use the interest paid on them as an expense to reduce the taxable profit and then pay lower tax.

On the other hand, cost of equity is more expensive than debt partly because the equity investors perceived equity to be riskier than debt. Therefore, they would require a higher return to compensate them for the higher risk. Note that return paid to investors is cost to the company.

Also, cost o equity includes such cost as issuing cost which further make equity more costly

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