Asked by Talin Mirzaei on Apr 27, 2024
Verified
If a firm that's doing very well pays the same return to equity and debt shareholders, and needs to raise more money, it may be wise to use debt because:
A) interest is tax deductible resulting in a lower cost to the firm.
B) Equity is the less desirable source of capital.
C) borrowing is always less of an effort than raising additional equity capital.
D) All of the above
Equity and Debt
The two main types of financing for companies: equity represents ownership (stocks), and debt represents borrowed funds (bonds or loans) that must be repaid.
Tax Deductible
Costs that can be deducted from total income to lower the taxable income amount.
Return to Equity
The amount of net income returned as a percentage of shareholders equity.
- Recognize and distinguish between the various methods of equity injection and their influence on a corporation's financial framework.
Verified Answer
IG
Israel GonzalezMay 01, 2024
Final Answer :
A
Explanation :
The fact that interest payments on debt are tax deductible makes the cost of debt financing lower for the firm compared to equity financing. Therefore, using debt may be the best choice for the firm in terms of cost.
Learning Objectives
- Recognize and distinguish between the various methods of equity injection and their influence on a corporation's financial framework.