Question
Which of the following statements is incorrect about the sources of finance used by companies: The company's choice between different external sources of finance does not impact its overall cost of capital. Long-term finance is for a period longer than one year whereas short-term finance is for a period shorter than one year The higher the risk associated with a source of finance, the higher the expected return from investors Internal sources of finance come from the company's own reserves. External sources of finance require the agreement of outside partics like lenders and investors.
Answer
3.4
(274 Votes)
Paige
Master · Tutor for 5 years
Answer
A
Explanation
## Step 1:We evaluate each statement and with whether each one is accurate or not. ## Step 2:Statement: "The company's choice between different external sources of finance does not impact its overall cost of capital." This is incorrect. The sources of finance a company chooses definitely impact its cost of capital. Different sources of external financing, such as loans, bonds, or equity financing carry different costs (interest rates, dividend payments, dilution of ownership) and risks, all of which affect the overall cost of capital.## Step 3:Statement: "Long-term finance is for a period longer than one year whereas short-term finance is for a period shorter than one year." This statement is true. The general classification for long-term finance refers to funding acquired for a period longer than a year, while short-term finance refers to any funding that will be repayed within a year.## Step 4:Statement: "The higher the risk associated with a source of finance, the higher the expected return from investors." This statement is accurate. Investors expect a higher return to compensate for undertaking higher risk. This principle is foundational to finance and investing,## Step 5:Statement: "Internal sources of finance come from the company's own reserves." This is accurate. Internal financing can consist of earnings from sales profits and royalties, depreciation, reserves plus any surplus from previous years, or any form of asset disposal.## Step 6:Statement: "External sources of finance require the agreement of outside parties like lenders and investors." This statement is technically true. A company needs the approval of lenders to secure loans and the consent of investors to issue securities as part of their financing activities.