- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 6. Capital Structure
- Subject 1. The Cost of Capital
CFA Practice Question
Which of the following is likely to lead to an increased use of debt?
B. Little shielded taxable income
C. A desire for financial flexibility
D. A relatively conservative management
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. |