The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.

Question

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The statement refers to the tax treatment of interest and dividends. In reality, the tax code typically allows corporations to deduct interest expenses on debt from their taxable income, which can encourage the use of debt financing. However, the exclusion from taxable income usually pertains to dividends received from investments in other corporations, not interest income, and this mechanism aims to mitigate double taxation of income rather than encourage debt financing.

The Fact That a Percentage of the Interest Income Received