Which of the following statements regarding the taxation of corporate profits is true?

Question

Quizplus · Accepted Answer

The tax treatment of corporate dividends creates a bias in favor of debt financing. This is because interest payments are deductible in computing corporate taxable income, while dividend payments are not. This tax treatment makes it less expensive for corporations to finance their operations through debt rather than equity. As a result, corporations with high debt-to-equity ratios may appear to have less burdensome cash flow commitments, but they also have a higher risk of insolvency.

Which of the Following Statements Regarding the Taxation of Corporate