Which one of these should be the primary appeal of unused debt capacity to a bidder firm?
A)Ability to borrow additional funds to increase management bonuses
B)Source of funding for negative net present value projects
C)Increased funding for the payment of unsustainable dividends
D)Tax savings resulting from increased interest expense on additional debt
E)Debt funding for a golden parachute

Question

Quizplus · Accepted Answer

The primary appeal of unused debt capacity for a bidder firm is the tax savings resulting from increased interest expense on additional debt. This is because the interest payments on debt are tax-deductible, which reduces the bidder firm's tax liability. Therefore, the ability to increase interest expense on additional debt through unused debt capacity can be a significant tax-saving opportunity for the firm. The other options presented (A, B, C, and E) are not desirable reasons for a bidder firm to use unused debt capacity.

Which One of These Should Be the Primary Appeal of Unused