Debt is generally the least expensive source of capital. This is primarily due to
A) the tax deductibility of interest payments.
B) its position in the priority of claims on assets and earnings in the event of liquidation.
C) the secured nature of a debt obligation.
D) fixed interest payments.

Question

Quizplus · Accepted Answer

Debt is generally less expensive than equity because the interest payments on debt are tax deductible in most cases. This reduces the after-tax cost of debt, making it a more attractive source of capital for companies. Choices B, C, and D are also factors that may contribute to the attractiveness of debt as a source of capital, but they are not the primary reason why debt is generally less expensive than equity.

Debt Is Generally the Least Expensive Source of Capital