ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations
Which of the following is a typical advantage of financing a company with debt rather than equity?
A typical advantage of debt is that interest is usually tax-deductible, which lowers its effective cost to the company. Unlike dividends, interest must be paid regardless of profit, and debt holders normally have no votes and do not increase shares in issue.
- AInterest is usually tax-deductible, making debt cheaper to the companyCorrect
- BDebt holders have voting rights over strategy
- CInterest need not be paid if profits are low
- DDebt increases the number of shares in issue
Explanation
Interest is generally an allowable expense for tax, reducing the effective cost of debt. Interest is a contractual obligation even in poor years, lenders do not normally vote, and debt does not create new shares.
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