Why Does Allowing for the Existence of Corporate Taxation Cause

question 73

Multiple Choice

Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible?

• A) Because the flotation costs associated with debt are significantly lower than the flotation costs associated with equity.
• B) Because debt is tax-deductible, the effective cost of debt is much cheaper than using equity.
• C) Because debt places fewer demands on the firm's cash flows.
• D) None of the options cause firms to prefer the maximum amount of debt possible.

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Definitions:

Statistically Significant

A term used to describe a result that is unlikely to have occurred by chance alone, according to a predetermined threshold of probability.

Variation

The occurrence of differences among individuals within a population, due to genetic differences or environmental factors.

Participants

Individuals who take part in a research study or experiment, providing data for analysis.

Standard Deviation

A statistical measure of the dispersion or variability within a data set, indicating how spread out the numbers are from the mean.