The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.

Question

Quizplus · Accepted Answer

The tax deductibility of interest provides a tax shield for debt financing, which lowers the after-tax cost of debt. This makes debt financing cheaper than equity financing, which does not offer any tax advantages. Therefore, the statement is true.

The Tax Deductibility of Interest Lowers the Cost of Debt