Long-term debt and bonds are considered a low-cost source of funds for a company

Question

Long-term debt and bonds are considered a low-cost source of funds for a company when compared with equity funds PRIMARILY because

Select one:

a. Dividends on common stock are a tax deductible expense, so stockholders require an extra return as compensation.

b. Stockholders do not require any return on their investment.

c. It is always cheaper to borrow funds than retain the profits (earnings) of the company.

d. Interest on debt is a tax deductible expense. After taking this into account, the actual cost of debt to the company is lower.

e. Dividends are guaranteed, but interest payments do not have to be paid if there are not enough profits.

Explanation / Answer

Long Term Debt and bonds are tax deductuble expenses of the organization, Means whenever the company borrow in debts or in bonds and ineterest paid on that will reduce the net profit and save the tax on these and because of the tax save the cost will be lower.

As per the above,

Answer = Option D= Interest on debt is a tax deductible expense. After taking this into account, the actual cost of debt to the company is lower.

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