Question

Which of the following is one of the main advantages of using long-term debt financing instead of equity financing?

A. Tax deductibility of dividends
B. Ability to raise large amounts of capital
C. Not having to pay back the principal
D. Tax-deductibility of interest

Answer 1

The main advantage of using long-term debt financing over equity financing is the D. tax-deductibility of interest, A. reducing the firm's tax liability.

Step-by-step explanation:

One of the main advantages of using long-term debt financing over equity financing is the tax-deductibility of interest. Long-term debt financing involves borrowing funds through mechanisms such as loans or bonds, and it requires the firm to make scheduled interest payments. A key benefit, unlike dividends paid on equity which are not tax-deductible, is that interest expenses on debt can be deducted from the company's taxable income, reducing the firm's tax liability. This is contrasted with equity financing, which involves selling company ownership and may result in losing some control over business decisions.