When the impact of taxes is considered, as the firm takes on more debt
A) there will be no change in total cash flows.
B) both taxes and total cash flow to stockholders and bondholders will decrease.
C) cash flows will increase because taxes will decrease.
D) the weighted average cost of capital will increase.

Question

Quizplus · Accepted Answer

When a firm takes on more debt, the interest payments on that debt are tax-deductible, which effectively reduces the firm's taxable income and thus its taxes. This reduction in taxes increases the total cash flows available to stockholders and bondholders.

When the Impact of Taxes Is Considered, as the Firm