Granting a tax deduction for corporate interest enables financial leverage to increase a firm's value by:
A)increasing EBIT.
B)decreasing the lender's share of EBIT.
C)decreasing the government's share of EBIT.
D)b and c

Question

Quizplus · Accepted Answer

Granting a tax deduction for corporate interest decreases the government's share of EBIT (Earnings Before Interest and Taxes) because the interest payments reduce taxable income, thereby reducing the amount of tax the company has to pay. This effectively increases the after-tax income available to the company, enhancing its value through financial leverage.

Granting a Tax Deduction for Corporate Interest Enables Financial Leverage