Which of the Following Statements Is CORRECT

question 60

Multiple Choice

Which of the following statements is CORRECT?

• A) Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than
• They would be if interest and dividends were both deductible.
• B) Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, which in 2008 could go up to 35%, but dividends received were taxed at a
• Maximum rate of 15%.
• C) The maximum federal tax rate on corporate income in 2008 was 50%.
• D) Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible
• From income when calculating income for tax purposes.
• E) The maximum federal tax rate on personal income in 2008 was 50%.

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Definitions:

Marginal Cost

An additional expense incurred from the production or acquisition of one more unit of a good or service.

Efficiency

The ability of a system or process to achieve a goal using the least amount of resources possible.

External Benefits

Positive effects experienced by third parties or the broader society as a result of an economic transaction or activity that are not reflected in market prices.

Market Demand Curve

A graphical representation showing the relationship between the price of a good and the total quantity demanded by all consumers in the market.