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Question

Due to which of the following reason Debt Financing is a cheaper source of finance? 

A Rate of interest Correct Answer Incorrect Answer
B Tax deductibility of interest Correct Answer Incorrect Answer
C Dividends are not payable to lenders Correct Answer Incorrect Answer
D Time value for money Correct Answer Incorrect Answer
E None of these Correct Answer Incorrect Answer

Solution

As per Indian Income tax Act, companies have to pay dividend distribution tax on payment of dividends to shareholders. Contrary to it, company gets tax benefit on interest payment to lenders or debt because interest is treated as expense of the company and therefore it is liable to pay tax only on net profit after deducting interest amount. 

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