The tax preference for debt financing versus internal equity financing:

Question

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The tax preference for debt financing versus internal equity financing depends on the personal tax rates of shareholders. If the personal tax rate of shareholders is high, they may prefer debt financing as interest payments are tax-deductible, hence reducing their tax liability. Conversely, if the personal tax rate of shareholders is low, they may prefer internal equity financing as dividend income is taxed at a lower rate than interest income. The investing cash flows of the firm, the beta of new projects, and the corporate tax rates of competing firms are not directly related to the tax preference for debt financing versus internal equity financing.

The Tax Preference for Debt Financing Versus Internal Equity Financing