The correct answer is: C. High marginal tax rates and high non-interest tax benefits.
Debt financing is a form of financing in which a company borrows money from a lender, such as a bank, to finance its operations. Equity financing is a form of financing in which a company sells shares of ownership in itself to investors.
The benefits of debt financing over equity financing include:
- Interest tax deduction: Interest paid on debt is tax-deductible, while dividends paid on equity are not. This means that debt financing can lower a company’s tax liability.
- Less dilution of ownership: When a company issues new shares of equity, it dilutes the ownership of existing shareholders. This can be a problem for companies that want to maintain control over their own destiny.
- Greater financial flexibility: Debt financing can provide a company with more financial flexibility than equity financing. This is because debt does not require a company to give up any ownership control.
The benefits of debt financing are likely to be highest in situations where a company has a high marginal tax rate and high non-interest tax benefits. A high marginal tax rate means that the company pays a high tax rate on its income. This means that the interest tax deduction can save the company a lot of money. High non-interest tax benefits means that the company has other tax benefits that can be used to offset the interest expense. This can further reduce the cost of debt financing.
In situations where a company has a low marginal tax rate or low non-interest tax benefits, the benefits of debt financing are likely to be lower. This is because the company will not be able to save as much money on taxes by using debt financing.