Which one of the following serves to differentiate debt from equity?
A)Interest on debt may be deferred, but dividends are a legal liability and must be paid every year.
B)Interest on debt is tax deductible while dividends to equity investors are not.
C)Debt has a maturity date which is much shorter than the maturity period of equity.
D)Debt holders are appointed while the board of directors elects equity holders.

Question

Quizplus · Accepted Answer

The tax deductibility of interest paid on debt is a key difference between debt and equity. Dividends to equity investors are not tax deductible, while interest on debt is. This difference in tax treatment makes debt more attractive to companies because it reduces their overall tax liability. The other options may also be true, but they are not as fundamental to the differentiation between debt and equity.

Which One of the Following Serves to Differentiate Debt from Equity