Why Does Allowing for the Existence of Corporate Taxation Cause

question 73

Multiple Choice

Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible?

• A) Because the flotation costs associated with debt are significantly lower than the flotation costs associated with equity.
• B) Because debt is tax-deductible, the effective cost of debt is much cheaper than using equity.
• C) Because debt places fewer demands on the firm's cash flows.
• D) None of the options cause firms to prefer the maximum amount of debt possible.

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Definitions:

Total Assets

The sum of all assets, both current and non-current, owned by a company, representing the total resources it has at its disposal.

Aging of Accounts Receivable Method

An accounting technique used to estimate the amount of receivables that are unlikely to be collected, based on the length of time they have been outstanding.

Percentage of Sales Method

A forecasting technique used to predict various financial figures, such as expenses or inventory levels, as a fixed percentage of sales.

Allowance for Doubtful Accounts

A contra asset account representing the amount of accounts receivable a company does not expect to collect.