Borrowing can add value for companies with high effective tax rates because:
A)borrowing increases total taxes.
B)the company is likely to use tax savings associated with debt.
C)the company tax saved from borrowing is equal to the additional personal tax paid.
D)the company tax saved from borrowing is less than the additional personal tax paid.

Question

Quizplus · Accepted Answer

Companies with high effective tax rates can benefit from borrowing because the interest paid on debt is tax-deductible, leading to tax savings. The company can use these tax savings to invest in projects that add value to the company. However, it is important to note that the tax savings from borrowing may not always fully offset the additional interest expense, leading to a net cost to the company.

Borrowing Can Add Value for Companies with High Effective Tax