Question : A high credit rating for a company indicates:
Option 1: Higher default risk
Option 2: Lower borrowing cost
Option 3: Reduced profitability
Option 4: Decreased liquidity
Correct Answer: Lower borrowing cost
Solution : The correct answer is (b) Lower borrowing cost
A high credit rating for a company indicates a lower borrowing cost. Credit rating agencies assess the creditworthiness of companies and assign credit ratings based on their evaluation of the company's ability to meet its financial obligations. A lower borrowing cost is a key benefit of having a high credit rating. It allows the company to access debt financing at more favorable terms, including lower interest rates and fees. This, in turn, reduces the company's overall cost of borrowing, making it more affordable for the company to raise funds through debt.
Question : A company with a high debt-equity ratio indicates:
Option 1: Higher risk for investors
Option 2: Higher profitability
Option 3: Higher liquidity
Option 4: Lower interest payments
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