Although the use of debt provides tax beneﬁts to the ﬁrm, debt also puts pressure on the ﬁrms to:
A)meet interest and principal payments which, if not met, can put the company into ﬁnancial
Distress.
B)make dividend payments which if not met can put the company into ﬁnancial distress.
C)meet both interest and dividend payments which when met increase the ﬁrm cash ﬂow.
D)meet increased tax payments thereby increasing ﬁrm value.
E)None of the above.

Question

Quizplus · Accepted Answer

The use of debt can put pressure on a firm to meet interest and principal payments, which if not met, can lead to the firm being in financial distress. This can ultimately lead to bankruptcy and a decrease in firm value. While debt does provide tax benefits, these benefits must be balanced against the risks of financial distress. Therefore, choice A is the best answer.

Although the Use of Debt Provides Tax Beneﬁts to the ﬁRm