Final answer:
The inexpensive nature of long-term debt is due to the tax-deductible status of interest payments, which reduces the overall cost of borrowing by lowering the firm's taxable income. This is a preferred option compared to issuing equity, which does not require fixed payments but dilutes ownership and introduces shareholders' influence.
Step-by-step explanation:
The inexpensive nature of long-term debt in a firm's capital structure is primarily due to the fact that interest payments are tax-deductible. The correct option from the given choices is c) interest payments are tax-deductible. This means that when the firm pays interest on its long-term debt, such as loans or bonds, it can deduct these payments from its taxable income, effectively lowering its tax burden.
Issuing equity, on the other hand, involves selling off part of the company's ownership in the form of stock. While this does not entail a fixed obligation to make payments, as equity capital does not have a fixed return and dividends are not mandatory, it does dilute current ownership and introduces a new dynamic with shareholders who can exert influence on the company's operations.
A firm’s decision to use debt or equity financing significantly impacts its financial structure and operations. Considering that interest payments made on debt are tax-deductible, many firms find long-term debt an attractive option despite the risk associated with the fixed commitments to interest payments.