Which of the following statements is correct?
A) The use of debt in the capital structure results in tax benefits to the firm.
B) Debt is referred to as "financial leverage" because it magnifies returns to shareholders.
C) Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing.
D) All of these choices are correct.

Question

Quizplus · Accepted Answer

All the statements provided are correct. Statement A is true because interest payments on debt are tax-deductible, which can reduce the overall tax liability of a firm. Statement B is accurate as the use of debt (financial leverage) can increase the potential returns to shareholders, though it also increases potential risk. Statement C is correct because debt management ratios, such as the debt-to-equity ratio, assess a firm's financial structure by comparing its debt to its equity, indicating how a firm has financed its operations and growth.

Which of the Following Statements Is Correct