Why Is Debt Financing Said to Include a Tax Shield

question 66

Multiple Choice

Why is debt financing said to include a tax shield for the company?

• A)taxes are reduced by the amount of the debt
• B)taxes are reduced by the amount of the interest
• C)taxable income is reduced by the amount of the debt
• D)taxable income is reduced by the amount of the interest

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Definitions:

Corrective Tax

A tax designed to encourage or discourage certain behaviors by including the cost of externalities, thereby correcting an inefficient market outcome.

Tax Revenue

The income that is gained by governments through taxation, serving as a primary source of financing government expenditures.

Tradable Pollution Permits

An economic strategy aimed at reducing pollution through financial motivations designed to cut down on pollutant emissions.

Corrective Taxes

Taxes imposed to correct the effects of a market failure, often used to discourage harmful behaviors and internalize externalities.