Question

question 4

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

debt interest payments are tax deductible
the company will be less leveraged
equity increases volatility
too much equity raises the risk of bankruptcy

Explanation:

Analyze the cost of debt versus equity

Debt financing offers a key tax advantage because interest payments on debt are tax-deductible expenses, which reduces the company's taxable income and overall tax liability.

Evaluate the incorrect options

• Issuing debt increases leverage, making the company more leveraged, not less.
• Equity does not inherently increase volatility compared to fixed-obligation debt.
• Debt, not equity, carries fixed repayment obligations that raise the risk of bankruptcy if unpaid.

Answer:

• debt interest payments are tax deductible (Correct answer)
• the company will be less leveraged
• equity increases volatility
• too much equity raises the risk of bankruptcy