Which of the following is a major advantage of debt financing?
A)Market interest rates on debt normally do not exceed 5 percent, which is much lower than market rates associated with common stock.
B)Interest payments on debt are a tax-deductible expense to the issuing firm.
C)Generally, interest payments on debt are based on the firm's net income, which means the interest is not paid unless the firm has enough income to cover the payments.
D)Normally the market values of bonds remain fairly stable, whereas common stock prices change substantially every day.
E)Firms that use great amounts of debt do not pay much in corporate taxes.

Question

Quizplus · Accepted Answer

Interest payments on debt are tax-deductible, which reduces the overall tax liability of the issuing firm. This is a major advantage of debt financing compared to equity financing, where dividends are not tax-deductible. The other options in the question are not entirely accurate or relevant. Market interest rates on debt can vary widely depending on creditworthiness and market conditions, and may exceed 5 percent in some cases. Interest payments on debt are usually fixed or adjustable, rather than based on the firm's net income. The stability of bond prices compared to stock prices is not necessarily an advantage, as it depends on the market conditions and the specific needs of the firm. Finally, the amount of corporate taxes paid by firms depends on many factors, including the level of debt financing.

Which of the Following Is a Major Advantage of Debt