The interest tax shield is a key reason why:
A)the required rate of return on assets rises when debt is added to the capital structure.
B)the value of an unlevered ﬁrm is equal to the value of a levered ﬁrm.
C)the net cost of debt to a ﬁrm is generally less than the cost of equity.
D)the cost of debt is equal to the cost of equity for a levered ﬁrm.
E)ﬁrms prefer equity ﬁnancing over debt ﬁnancing.

Question

Quizplus · Accepted Answer

The interest tax shield refers to the tax savings a firm receives from deducting interest payments on debt from its taxable income. This tax savings effectively reduces the net cost of debt to the firm, making it generally less than the cost of equity. Therefore, choice C is the best choice as it accurately describes the role of the interest tax shield in reducing the net cost of debt to the firm.

The Interest Tax Shield Is a Key Reason Why