The Interest Tax Shield Is a Key Reason Why

question 19

Multiple Choice

The interest tax shield is a key reason why:

• A)the net cost of debt to a firm is generally less than the cost of equity.
• B)the value of an unlevered firm is equal to the value of a levered firm.
• C)the required rate of return on assets rises when debt is added to the capital structure.d.the cost of debt is equal to the cost of equity for a levered firm.
• D)firms prefer equity financing over debt financing.

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Definitions:

Temporary Account

An account used in accounting that is closed at the end of each accounting period, transferring its balance to a permanent account.

Cash Sales

Transactions where payment for goods or services is made at the time of sale in cash or equivalent forms.

Credit Sales

Sales made by a business where payment is delayed, allowing the customer to purchase goods or services on account.

Accrual Basis

The Accrual Basis of accounting records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged.