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Question

Cost of capital is lowest in case of debt due to which of the following:

A Time value of money Correct Answer Incorrect Answer
B Interest is tax deductible Correct Answer Incorrect Answer
C Low rate of interest Correct Answer Incorrect Answer
D All of the above Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

The cost of debt is typically lower than the cost of equity because the interest payments on debt are tax deductible, while dividends paid to shareholders are not. When a company issues debt, it is required to make regular interest payments to its lenders. These interest payments can be deducted from the company's taxable income, which reduces its tax liability.

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