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:

Rental Expenses

Costs incurred in the operation, maintenance, and improvement of a property rented out, which can often be deducted for tax purposes.

Deductible

The amount paid out of pocket by the policyholder before an insurance company pays a claim.

Personal/Rental

Refers to properties or items that are used both for personal purposes and rented out for income, requiring specific tax treatment for the income and expenses.

Rental Activity

Engaging in leasing out property as a business or investment, generating income from tenants paying rent.