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.

Question

Quizplus · Accepted Answer

Debt requires firms to make regular interest and principal payments. Failure to meet these obligations can lead to financial distress or bankruptcy, unlike dividends which are discretionary and can be adjusted based on the firm's financial health.

Although the Use of Debt Provides Tax Benefits to the Firm