Which of the following statements is correct?
A) With no taxes and no bankruptcy costs, debt is more costly than equity.
B) Bankruptcy costs are a disadvantage to debt.
C) Bankruptcy costs may offset the tax benefit of debt.
D) All of the above.
E) b and c

Question

Quizplus · Accepted Answer

Bankruptcy costs are a disadvantage to debt as they increase the overall cost of borrowing. However, the tax benefit of debt can outweigh the bankruptcy costs. This means that bankruptcy costs may offset the tax benefit of debt, making it less favorable than equity. Therefore, choice E is the correct answer. Choice A is incorrect because it assumes no taxes and bankruptcy costs, which is not realistic.

Which of the Following Statements Is Correct