The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that ________.

Question

Quizplus · Accepted Answer

Long-term debt typically has a lower cost of capital compared to equity because it has a fixed rate of return and a maturity date. This makes it less risky for investors, and therefore, less expensive for the firm. Option A is incorrect because debt holders are not the true owners of the firm. Option B is incorrect because equity capital is not fixed, and its return varies based on the company's performance. Option D is incorrect because dividend payments are not tax-deductible.

The Inexpensive Nature of Long-Term Debt in a Firm's Capital