Which of the following statements about the use of a bank loan in this situation is true?

JK is seeking to raise finance for a project and the directors would prefer to take out a fixed rate bank loan repayable over the next 5 years. The project will increase the profit of JK even after taking into account the additional interest costs.

Which of the following statements about the use of a bank loan in this situation is true?
A . In the long term servicing a bank loan is more expensive than servicing equity shares due to the higher risk for the lender.
B . The interest on a bank loan is deducted from profit before dividends can be declared to equity shareholders each year.
C . Because the assets of a business belong to the equity shareholders, a bank loan should NOT be secured on the assets of the business.
D . A bank loan has high issue costs compared to an issue of equity shares because it takes longer to arrange.

View Answer

Answer: B