Choose the Statement That Correctly Summarizes the Tax Advantage of Raising

question 116

Multiple Choice

Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock:

• A)The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax.
• B)Interest payments are deductible in determining income subject to corporate income tax;dividends are not deductible.
• C)A corporation must pay tax on the sales price of stock issued,but is not taxed on the amount received when bonds are issued.
• D)Both interest and dividends paid are deductible in computing taxable income,but since interest must be paid annually,the corporation usually gets a larger tax deduction over the life of the bonds payable.

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Definitions:

Equity-Financed

Funded through the sale of owner's shares, rather than borrowing or accumulating debt.

Synergy Value

The added value created by combining two companies where the performance of the combined entity is greater than the sum of the separate individual parts.

Acquisition

The process of taking control of another company by purchase or merger.

Outstanding Stock

Shares of a company that are owned by investors, including both public investors and company officers.