Why Does Allowing for the Existence of Corporate Taxation Cause

question 22

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 these causes firms to prefer the maximum amount of debt possible.

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Definitions:

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, indicating how much the values in the dataset deviate from the mean.

Extreme Scores

Values in a data set that are significantly higher or lower than the majority of the data, potentially acting as outliers.

Variability

Indicates the extent to which data points in a data set differ from the mean or each other.

Variance

A statistical measurement of the spread between numbers in a data set, representing how much the numbers differ from the average of the numbers.