The inexpensive nature of long-term debt in a firm's capital structure is partly because ________.

Question

Quizplus · Accepted Answer

Long-term debt generally has a lower cost of capital than equity because it has a fixed interest rate and maturity date, which reduces the risk for investors. Additionally, interest payments on debt are tax-deductible, which further lowers the company's cost of capital. However, debt holders are not the true owners of the firm, and equity capital does not have a fixed return.

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