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What is the major advantage of debt financing?
ADividends on it are deductible from income
BInterest on it is deductible for tax purposes
CLenders gain a vote in how the firm is run
DIt never has to be repaid to the lender
Answer & Solution
Correct answer: B. Interest on it is deductible for tax purposes
1. The major advantage of debt financing is that interest expense is deductible for income tax purposes, which lowers its overall cost.
2. There is also no loss of ownership, since creditors typically have no say in management unless the borrower defaults.
3. Dividends are not deductible, so the first option attaches a debt benefit to equity.
4. Debt has a stated maturity and requires repayment of principal by a specified date, so it certainly must be repaid.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.4 Raising Long-Term Financing_
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