Paper 1 · June 2019 · Sources of Finance
Which of the following is an advantage of debt financing (borrowing) for a business, compared to raising money by issuing new shares?
AIt avoids diluting existing shareholders' ownership, since no shares are sold.
BIt permanently increases the business's total liabilities with no repayment obligation at all.
CIt gives the lenders voting rights over how the business is run day to day.
DInterest paid on the loan cannot be deducted for tax purposes at all.
Explanation
Borrowing does not require issuing new shares, so existing shareholders keep their proportional ownership and control; lenders have no voting rights, interest is tax deductible, and the loan is repaid rather than being a permanent addition to liabilities.
Derived from ZIMSEC Business_studies Paper 1, June 2019, Q8