CFA Practice Question

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CFA Practice Question

Which of the following is likely to lead to an increased use of debt?

A. A higher degree of business risk
B. Little shielded taxable income
C. A desire for financial flexibility
D. A relatively conservative management
Correct Answer: B

If a firm has few or no tax shields, then there is incentive to take on debt (due to the tax deductibility of the interest payment).

User Contributed Comments 5

User Comment
rockeR I really dont understand this concept. little used tax shield--->tax deductibility of interest payment. why??
setmefree assume the reason for low after tax income is because of high tax rate, then the firm can take more advantage from debt interest taxshield, compared to a firm with lower tax rate.
todolist Debt can be written off against taxable income, therefore for company's with little tax shelter, there is more incentive to create more debt and therefore pay less tax
Rubbish less shield=more tax which leads to a larger tax exemption from debt interest
khalifa92 companies shield their income with tax decuctions from increased debt.
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