Although the Use of Debt Provides Tax Benefits to the Firm

question 31

Multiple Choice

Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firms to:

• A) meet interest and principal payments which if not met can put the company into financial distress.
• B) make dividend payments which if not met can put the company into financial distress.
• C) meet both interest and dividend payments which when met increase the firm cash flow.
• D) meet increased tax payments thereby increasing firm value.

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Definitions:

Traditional Costing Method

An accounting strategy that allocates overhead costs to products based on a predetermined rate, without considering the actual activities that incur costs.

Unit Product Cost

The calculated expense for producing a single unit, taking into account all costs of production from raw materials to finished goods.

Unit Product Cost

The total cost, including materials, labor, and overhead, to produce a single unit of a product.

Activity-Based Costing

Activity-based costing is a method of assigning indirect costs to products and services based on the activities they require.