Tucker Enterprises has $100,000 worth of debt financing and $200,000 in equity financing. This year it paid $8,000 in interest on its debt and paid $8,000 in dividends to stockholders. The CFO of Tucker Enterprises is considering raising more capital via debt financing. One reason why debt financing is more attractive than equity financing is that:
A) interest payments will result in a reduction in its taxes.
B) dividend payments will result in a reduction in its taxes.
C) interest payments will increase both taxes and retained earnings.
D) fixed payments to the creditors can be avoided.

Question

Quizplus · Accepted Answer

One reason why debt financing is more attractive than equity financing is that interest payments on debt financing are tax-deductible, which results in a reduction in the company's taxes. This makes debt financing more cost-effective than equity financing for companies with a high tax rate.

Tucker Enterprises Has $100,000 Worth of Debt Financing and $200,000