Question

Which of the following is an advantage of debt financing?

a. The interest payments a firm makes on debt are up to 30% tax-deductible.
b. A firm using debt financing is not required to make fixed payments.
c. It is less risky than equity financing.
d. It is more flexible than equity financing.

Answer 1

Debt financing offers the advantage of tax-deductible interest payments.

Step-by-step explanation:

The advantage of debt financing is that the interest payments a firm makes on debt are up to 30% tax-deductible. This means that the firm can reduce its taxable income by the amount of interest paid, resulting in lower tax payments. This is a significant benefit as it helps to lower the overall cost of borrowing.