Question

Although the use of debt provides tax benefits to the firm, debt also puts pressure on the firm to: I) meet interest and principal payments, which if not met can put the company into financial distress; II) make dividend payments, which if not met can put the company into financial distress; III) meet both interest and dividend payments, which when met increase the firm cash flow; IV) meet increased tax payments, thereby increasing firm value

Answer 1

I) meet interest and principal payments, which if not met can put the company into financial distress

Step-by-step explanation:

Among the given options the first option is correct with respect to pressure on the firm as if the payment of debt is not given so the chances of liquidation of the firm are high that comes under the bankruptcy

So while taking the debt we need to pay the interest and principal payments so that the chances of the liquidation would be less

hence, the first option is correct