CFA Practice Question

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CFA Practice Question

The positive value to the firm of adding debt to the capital structure in the presence of corporate taxes is:

A. due to the extra cash flow going to the investors of the firm instead of the tax authorities.
B. due to the earnings before interest and taxes being fully taxed at the corporate rate.
C. because personal tax rates are the same as corporate tax rates.
D. because shareholders prefer to let financial managers choose the capital structure thus making their value independent of it.
Correct Answer: A

User Contributed Comments 1

User Comment
sarath The tax rebate on the debt interest payments effectively means that money which should have gone to the tax authorities is going to the investors of the firm....
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