Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to:
I. Meet interest and principal payments which if not met can put the company into financial distress
II. Make dividend payments which if not met can put the company into financial distress
III. Meet both interest and dividend payments which when met increase the firm cash flow
IV. Meet increased tax payments thereby increasing firm value

Question

Quizplus · Accepted Answer

The use of debt provides tax benefits to the firm, but it also puts pressure on the firm to meet interest and principal payments. If the firm fails to meet these payments, it can lead to financial distress. Meeting dividend payments is not necessarily tied to the use of debt, and meeting both interest and dividend payments does not necessarily increase the firm's cash flow. Meeting increased tax payments also does not necessarily increase firm value.

Although the Use of Debt Provides Tax Benefits to the Firm