Why Is Debt Financing Said to Include a Tax Shield

question 52

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:

Monthly Net Operating Income

The profit a business makes after paying for all operating expenses but before interest and taxes within a month.

Organic Fertilizer

A natural substance used to enrich the soil with nutrients, derived from plant or animal matter without synthetic additives.

Sales Commissions

Payments made to sales employees or agents, typically calculated as a percentage of the sales they generate.

Net Operating Income

A financial metric that represents the total earnings generated from a company's operations, excluding non-operating income and expenses like interest and taxes.