As the level of debt increases, the tax benefits of debt increase until

Question

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The tax benefits of debt increase until the tax shield benefits exceed the distress costs. At this point, taking on more debt would not be beneficial as the costs associated with financial distress would outweigh the tax benefits. Option A is incorrect as interest costs and dividend payments are not directly related to the tax benefits of debt. Option C and D are also incorrect as they are not relevant to the relationship between debt and tax benefits.

As the Level of Debt Increases, the Tax Benefits of Debt