The interest tax shield is a key reason why:
A) The required rate of return on assets rises when debt is added to the capital structure.
B) The value of an unlevered firm is equal to the value of a levered firm.
C) The net cost of debt to a firm is generally less than the cost of equity.
D) The cost of debt is equal to the cost of equity for a levered firm.
E) Firms prefer equity financing over debt financing.

Question

Quizplus · Accepted Answer

The interest tax shield refers to the tax savings achieved by a firm through the deductibility of interest expenses. This reduces the net cost of debt because the tax savings effectively lower the interest payments, making debt cheaper than equity, which does not offer such tax benefits.

The Interest Tax Shield Is a Key Reason Why