The introduction of personal taxes may reveal a disadvantage to the use of debt if the:
A) personal tax rate on the distribution of income to stockholders is less than the personal tax rate on interest income.
B) personal tax rate on the distribution of income to stockholders is greater than the personal tax rate on interest income.
C) personal tax rate on the distribution of income to stockholders is equal to the personal tax rate on interest income.
D) the personal tax rate on interest income is zero.

Question

Quizplus · Accepted Answer

When the personal tax rate on the distribution of income to stockholders (dividends) is less than the personal tax rate on interest income, individuals would prefer to receive income as dividends rather than interest. This preference makes debt financing less attractive because the interest paid on debt is taxed more heavily at the personal level compared to dividends.

The Introduction of Personal Taxes May Reveal a Disadvantage to the Use