Question

Which of the following is an advantage of debt financing?

Multiple Choice

A) It does not have to be repaid.

B) Interest is discretionary.

C) Interest is tax deductible.

D) It reduces stockholder control.

Answer 1

Debt financing's main advantage is that interest on the debt is tax deductible, which helps reduce a company's taxable income.

Step-by-step explanation:

One advantage of debt financing for a company is that the interest on the debt is tax deductible. This provides a significant benefit to businesses by lowering their taxable income and thus reducing the amount of tax they owe.

Unlike issuing equity, debt does not dilute the ownership of the company's current shareholders, and the firm maintains control of its operations without additional oversight from new shareholders. However, companies are still obligated to make scheduled interest payments on their debt, regardless of their income levels.