The Interest Tax Shield Is a Key Reason Why

question 10

Multiple Choice

The interest tax shield is a key reason why

• A)the value of an unlevered firm is equal to the value of a levered firm.
• B)the net cost of debt to a firm is generally less than the cost of equity.
• C)firms tend to minimize their borrowing.
• D)the cost of debt is equal to the cost of equity for a firm with a debt-to-equity ratio of 1.
• E)firms prefer equity financing over debt financing.

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Definitions:

Sales Over Cost

It refers to the ratio or difference between the sales generated and the cost of the goods sold, aimed at measuring profitability.

Gross Profit

The income a firm generates once it subtracts the expenses involved in the production and sale of its goods, or the expenses incurred from offering its services.

Income From Operations

The earnings generated from a company's everyday, core business operations.

Single-Step Statement

An income statement format that totals revenues and subtracts expenses to find the net income, using only one step.