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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