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Question

Debt financing is sometimes preferred by the corporate due to the fact that:

A interest on debt is an allowable deduction under Income Tax Act. Correct Answer Incorrect Answer
B working on high debt is relatively less riskier as compared to equity shares. Correct Answer Incorrect Answer
C normally, debt financing can easily be availed during start-up phase of a company. Correct Answer Incorrect Answer
D usually handling the debtors is easier than the shareholders during losses. Correct Answer Incorrect Answer

Solution

Interest on debt is considered a business expense and is tax-deductible under the Income Tax Act in most jurisdictions, including many countries that follow the principles of taxation. This means that the interest paid on debt reduces the taxable income of the company, resulting in lower tax liability. By utilizing debt financing, companies can benefit from the tax deductibility of interest expenses, which can lead to potential tax savings and improve the company's overall financial position.

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