The Interest Tax Shield Is a Key Reason Why

question 204

Multiple Choice

The interest tax shield is a key reason why:

• A) The required rate of return on assets rises when debt is added to the capital structure.
• B) The value of an unlevered firm is equal to the value of a levered firm.
• C) The net cost of debt to a firm is generally less than the cost of equity.
• D) The cost of debt is equal to the cost of equity for a levered firm.
• E) Firms prefer equity financing over debt financing.

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Definitions:

Exchange Rates

The value of one currency for the purpose of conversion to another, indicating how much one currency can be exchanged for another currency.

Functional Currency

The primary currency of the primary economic environment in which the entity operates, usually the local currency or the currency of the primary sales market.

Current Rate Method

A method of foreign currency translation where assets and liabilities are converted at the current exchange rate.

U.S. GAAP

Stands for United States Generally Accepted Accounting Principles, which are the accounting standards used by companies in the United States to prepare their financial statements.