The inexpensive nature of long-term debt in a firm's capital structure is due to the fact that ________.
A) the equity holders are the true owners of the firm
B) equity capital has a fixed return
C) creditors have a higher position in the priority of claims
D) dividend payments are tax-deductible

Question

Quizplus · Accepted Answer

Creditors have a higher position in the priority of claims compared to equity holders, which makes long-term debt less risky and thus less expensive for the firm. Equity holders are paid after all debts have been satisfied, making debt financing cheaper due to its lower risk.

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