Why Is It Important to Include the Tax Effect into Cost

question 55

Multiple Choice

Why is it important to include the tax effect into cost of capital computations for firms with debt financing?

• A) Firms pay taxes on the outstanding principal amount of the debt.
• B) Taxable income is reduced by the amount of the interest expense.
• C) Comparisons with equity financing would otherwise not be possible.
• D) Taxes are paid on interest but not on dividends.

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Definitions:

Cash Conversion

The process of turning physical goods, services, or other assets into cash, often measuring the efficiency of a company in generating revenue.

Credit Policies

Guidelines set by businesses to determine the terms and conditions for extending credit to customers.

Working Capital Policy

A strategy relating to managing a firm's short-term assets and liabilities with the objective of maintaining sufficient liquidity to carry out operations smoothly.

Top Management

The highest level of managers and executives who have the day-to-day responsibilities of managing a company or corporation, making strategic decisions.