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) interest payments are tax-deductible
D) equity holders have a higher position in the priority of claims

Question

Quizplus · Accepted Answer

Interest payments on long-term debt are tax-deductible, making the cost of debt lower than the cost of equity. This is because the company's taxable income is reduced by the interest paid on the debt, resulting in a lower tax liability for the company.

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