The interest tax shield is a key reason why
A)the value of an unlevered firm is equal to the value of a levered firm.
B)the net cost of debt to a firm is generally less than the cost of equity.
C)firms tend to minimize their borrowing.
D)the cost of debt is equal to the cost of equity for a firm with a debt-to-equity ratio of 1.
E)firms prefer equity financing over debt financing.

Question

Quizplus · Accepted Answer

The interest tax shield allows firms to deduct the interest paid on debt from their taxable income, which effectively reduces the net cost of debt to the firm. This is why the net cost of debt is generally lower than the cost of equity.

The Interest Tax Shield Is a Key Reason Why