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Compared with equity, debt is generally a cheaper source of finance largely because:
Adebt never has to be repaid
Bdividends on equity are guaranteed
Cinterest on debt is tax-deductible and lenders bear less risk
Dinterest on debt need not be paid
Answer & Solution
Correct answer: C. interest on debt is tax-deductible and lenders bear less risk
Debt is cheaper because interest is tax-deductible and lenders, having prior claim, bear less risk than equity holders.
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