[amp_mcq option1=”Time Value of Money” option2=”Rate of Interest” option3=”Tax-deductibility of Interest” option4=”Dividends not payable to lenders” correct=”option3″]
The correct answer is C. Tax-deductibility of Interest.
Debt financing is a cheaper source of finance because the interest paid on debt is tax-deductible. This means that the company can reduce its taxable income by the amount of interest it pays. This can lead to a significant tax savings, which can make debt financing a more attractive option than equity financing.
The other options are not correct because:
- Time Value of Money: This is the concept that money has value today and that its value decreases over time. This is not a factor that makes debt financing cheaper than equity financing.
- Rate of Interest: The rate of interest is the amount of interest that a lender charges a borrower for a loan. The rate of interest is not a factor that makes debt financing cheaper than equity financing.
- Dividends not payable to lenders: Dividends are payments that a company makes to its shareholders. Dividends are not a factor that makes debt financing cheaper than equity financing.