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 a company receives by deducting interest expense from its taxable income. This reduces the net cost of debt to the company, making it generally less expensive than equity. Therefore, the correct option is C.

The Interest Tax Shield Is a Key Reason Why