All Else Equal, Which of the Following Statements Is True

question 33

Multiple Choice

All else equal, which of the following statements is true from a tax standpoint, given current U.S. tax laws?

• A)Although a firm is able to deduct both interest expense and dividend distributions in determining taxable income, investors prefer to receive dividend income since it is taxed at
• A lower rate.
• B)Corporate tax liability is decreased with the use of debt, but interest income is not tax-advantaged to the investors.
• C)The use of debt can result in lower taxes for the corporation, and interest income is taxed at preferred rates at the investor level.
• D)The tax-preferred financing method is the use of retained earnings since a firm does not pay any taxes on reinvested earnings, and capital gains are not taxed at the investor level
• Until they are realized.