Question

The inexpensive nature of longminusterm debt in a​ firm's capital structure is partly because​ ________. A. the equity holders are the true owners of the firm B. equity holders have a higher position in the priority of claims C. equity capital has a fixed return D. interest payments are taxminusdeductible

Answer 1

Answer:

D. Interest payments are tax-deductible

Explanation:

Long term sources of finance for an entity are basically long term debt, common stock, preferred stock and retained profits. Long term financing refers to availing funds required to finance capital projects, for a period exceeding 1 year.

Among the available sources such as equity and debt, the latter is considered cheaper since unlike dividends, interest payable on debt is tax deductible.

In case of equity, the holders become the owners and issue of more equity may lead to dilution of control.

The dividend payable on shares is an appropriation of profits while interest paid on debt is a charge against the profits. Thus, the latter is allowed to be deducted while computing net income for tax purposes unlike dividend.