Question

one reason a company may choose to issue additional debt instead of equity when raising capital is that _______.

○ too much equity raises the risk of bankruptcy

○ equity increases volatility

○ the company will be less leveraged

○ debt interest payments are tax - deductible

Explanation:

To determine the correct answer, we analyze each option:

• "Too much equity raises the risk of bankruptcy": Incorrect. High debt (not equity) typically increases bankruptcy risk.
• "Equity increases volatility": Incorrect. Equity ownership doesn't inherently increase volatility in a way that makes debt more favorable for this reason.
• "The company will be less leveraged": Incorrect. Issuing debt increases leverage, while issuing equity decreases it. This option's reasoning is opposite.
• "Debt interest payments are tax - deductible": Correct. This is a key advantage of debt financing. Interest on debt is tax - deductible, which reduces the after - tax cost of debt, making it an attractive option compared to equity (where dividends are not tax - deductible for the company).

Answer:

D. debt interest payments are tax - deductible