The positive value to the firm by adding debt to the capital structure in the presence of corporate taxes is:
I. Due to the extra cash flow going to the investors of the firm rather than the tax authorities
II. Due to the earnings before interest and taxes being fully taxed at the corporate rate
III. Because personal-tax rates are the same as corporate tax rates
A) I only
B) II only
C) III only
D) II and III only

Question

Quizplus · Accepted Answer

The positive value to the firm by adding debt is primarily due to the tax shield on interest payments, which means more cash flow goes to investors rather than being taxed, as stated in I.

The Positive Value to the Firm by Adding Debt to the Capital