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 company is equal to the value of a levered company.
C) the net cost of debt is generally less than the cost of equity.
D) the cost of debt is equal to the cost of equity for a levered company.
E) companies prefer equity financing over debt financing.

Question

Quizplus · Accepted Answer

The interest tax shield refers to the deduction of interest expenses from taxable income, which reduces the tax liability of a company. This reduces the net cost of debt to the company, making it generally less than the cost of equity. Thus, C is the correct choice. A, B, D, and E are incorrect as they do not accurately reflect the impact of the interest tax shield.

The Interest Tax Shield Is a Key Reason Why