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  • Advantages of Issuing Debt

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    One of the advantages of issuing debt over equity is that interest payments on debt are tax deductible, reducing the effective cost of debt. When a company uses more fixed costs for production, such as manufacturing, this is an example of operating leverage which increases financial risk if sales or production volumes decline. Issuing debt provides a tax advantage over equity through deductible interest payments.

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    One of the advantages of issuing debt over equity is that interest payments on debt are tax deductible, reducing the effective cost of debt. When a company uses more fixed costs for production, such as manufacturing, this is an example of operating leverage which increases financial risk if sales or production volumes decline. Issuing debt provides a tax advantage over equity through deductible interest payments.

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    6 views1 page

    Advantages of Issuing Debt

    Uploaded by

    pearl
    One of the advantages of issuing debt over equity is that interest payments on debt are tax deductible, reducing the effective cost of debt. When a company uses more fixed costs for production, such as manufacturing, this is an example of operating leverage which increases financial risk if sales or production volumes decline. Issuing debt provides a tax advantage over equity through deductible interest payments.

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    © All Rights Reserved
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    1.

    One of the advantages of issuing debt over equity is that debt:

    a. Has no maturity date.

    b. Reduces risk.

    c. Requires no fixed payments.

    d. Has a tax deduction for interest payments.

    Answer = d: Interest is a tax deduction and thus the effective rate you pay on debt is lower than
    the face value paid. There is no deduction for payments made to shareholders, such as dividends
    or distributions to owners.

    2. When a company uses increased fixed costs for production, this is an example of what type
    of leverage?

    a. Operating Leverage

    b. Financial Leverage

    c. Variable Cost Leverage

    d. Money Market Leverage

    Answer = a: Operating leverage is the use of more fixed costs associated with the operations of
    the business, such as the manufacturing of products.

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