As a result of the provisions of the U.S. tax code, corporations are encourages to use this form...

Question:

As a result of the provisions of the U.S. tax code, corporations are encourages to use this form of financial capital in their capital structures.

What is/are _____?

Everything else held constant, as a firm takes on more debt, this happens to its probability of bankruptcy/

What is _____?

Everything else held constant, an increase in a firm's reliance on debt will have this effect on its risk of bankruptcy.

What is _____?

Between debt and equity financing, this form of financing is less expensive when compared to an after-tax basis.

What is _____?

Debt:

This question calls for a general understanding of the sources of financial capital available to a firm. The most common sources include debt and equity. From an investment perspective, the former represents a loan to the firm, and the latter represents an ownership interest in the firm.

Answer and Explanation:

The U.S. tax code provides for the deductibility of interest expense payments on debt. This facilitates tax savings for firms that use this form of financial capital in their capital structures. As a result, one can say corporations are encouraged to use this form of capital over other sources, such as common and preferred equity, which offer no such tax deductibility on distributions to shareholders.

Responses to the specific questions posed are below.

As a result of the provisions of the U.S. tax code, corporations are encourages to use this form of financial capital in their capital structures.

What is/are debt?

Everything else held constant, as a firm takes on more debt, this happens to its probability of bankruptcy/

What is increase?

Everything else held constant, an increase in a firm's reliance on debt will have this effect on its risk of bankruptcy.

What is increase?

Between debt and equity financing, this form of financing is less expensive when compared to an after-tax basis.

What is debt?


Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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