For Companies That Are Unable to Make Immediate Use of Interest

question 10

Multiple Choice

For companies that are unable to make immediate use of interest deductions,borrowing is likely to have:

• A)a positive net tax advantage.
• B)a net tax disadvantage.
• C)a positive impact on financial distress because of the tax deductibility of interest on debt.
• D)a benefit of achieving an optimal capital structure.

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Definitions:

Imperfect Competitor

A firm or entity that has the ability to influence the price of the goods or services it sells, due to the lack of perfect competition in the market.

Wage Rate

The fixed amount of compensation or payment given to an employee by an employer in exchange for work performed, typically expressed on an hourly, daily, or piecework basis.

Workers

Individuals engaged in any form of employment or activity to earn income through the provision of labor or services.

Substitution Effect

The economic principle stating that as the price of a good or service rises, individuals will replace more expensive items with less costly alternatives.