Debt financing can add value to a firm because ________.
A) it enables investors and firms to develop long-term relationships through a joint business endeavor
B) some governments allow firms to deduct interest payments from their taxes
C) it limits the risk of bankruptcy
D) it increases the cash flow toward the company compared to equity financing

Question

Quizplus · Accepted Answer

Debt financing can add value to a firm because interest payments on debt are tax-deductible in many jurisdictions. This tax shield effectively reduces the firm's taxable income, thereby lowering its tax liability and increasing the value to the firm.

Debt Financing Can Add Value to a Firm Because ________