Paying Interest Reduces the Taxes Owed by a Firm

question 40

Multiple Choice

Paying interest reduces the taxes owed by a firm.Which one of the following terms applies to this relationship?

• A)financial risk
• B)M&M Proposition I
• C)interest tax shield
• D)static theory of interest rates
• E)homemade leverage

---

Definitions:

Corporations

Legal entities that are separate from their owners, with the ability to own property, incur liabilities, and sell stock.

Corporation

A business firm that is a legal person. Its chief advantage is that each owner’s liability is limited to the amount of money he or she invested in the company.

Stockholders

Individuals or entities that own shares in a corporation, possessing ownership interests and rights to dividends.

Owned

The state of having legal rights to possess, use, and control a property or asset.