Select all that applyAdvantages of debt financing over equity financing are that ______. (Check all that apply.)Multiple select question.interest payments on debt are tax deductiblecontrol is not dilutedrepayment of debt principal is optionalmore money is available
Question
Select all that applyAdvantages of debt financing over equity financing are that ______. (Check all that apply.)Multiple select question.interest payments on debt are tax deductiblecontrol is not dilutedrepayment of debt principal is optionalmore money is available
Solution
The advantages of debt financing over equity financing are:
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Interest payments on debt are tax deductible: This means that the interest paid on the debt can be deducted from the company's taxable income, reducing the overall tax liability.
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Control is not diluted: When a company issues equity, it is essentially selling a part of the company to the public. This can lead to a dilution of control as the original owners now have to share decision-making power with the new shareholders. In contrast, debt financing does not involve selling any part of the company, so control is not diluted.
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More money is available: Generally, companies can raise larger amounts of capital through debt financing than through equity financing. This is because lenders are more willing to lend larger amounts of money, as they have the assurance of getting their money back with interest.
The statement "repayment of debt principal is optional" is not correct. The principal amount of a debt must be repaid by the borrower to the lender at the end of the loan term. Failure to do so can lead to serious consequences, including legal action.
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