BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Make debt relatively less cheap home
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Make debt relatively cheaper
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No impact on the cost of debt
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Make deby relatively costly
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Detailed explanation-1: -When there is an increase in the tax on corporate profit, the debt becomes relatively cheaper. This is because interest that is to be paid to the debtors is deducted from the total income before calculating the value of tax. Thus, as the value of tax increases, the debt becomes relatively cheaper.
Detailed explanation-2: -Cost of Debt is affected by tax rate because Interest on Debt is a deductible expense. A higher tax rate, thus, makes debt relatively cheaper as compared to equity. For Example: If the firm borrows 10% and tax rate is 30%, then the after cost of debt will be 7%.
Detailed explanation-3: -The answer is “2. An increase in the corporate tax rate."
Detailed explanation-4: -Which one of the following factors might cause a firm to increase the debt in its financial structure? Explanation: Interest on debt financing is tax-deductible whereas dividends from equity are not. An increase in tax rates might cause a firm to increase debt financing.