Although the use of debt provides tax benefits to the firm,debt also puts pressure on the firm 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.
E) None of these.

Question

Quizplus · Accepted Answer

The use of debt comes with the obligation to make regular interest and principal payments. If these payments are not met, the company may face financial distress, which can negatively impact its operations and ultimately its value. Therefore, debt puts pressure on firms to meet these obligations. None of the other options are accurate as meeting dividend payments is not an obligation of debt, and increased tax payments would not increase firm value as it reduces cash flow.

Although the Use of Debt Provides Tax Benefits to the Firm,debt