Asked by Ashley Elizabeth on Jun 03, 2024
Verified
The presence of personal taxes completely eliminates the benefits of debt financing.
Personal Taxes
Taxes levied on individuals or households based on their income, property, and consumption, which contribute to federal, state, or municipal revenues.
Debt Financing
The method of raising capital through the sale of bonds, bills, or notes to individuals or institutional investors, which must be repaid at a future date, typically with interest.
- Explain the role of debt financing and its impact on firm valuation and cost of capital.
Verified Answer
CH
Chase HaimerlJun 07, 2024
Final Answer :
False
Explanation :
Personal taxes do not completely eliminate the benefits of debt financing. Although interest payments on debt are tax-deductible for businesses, personal taxes may apply to the owner of a sole proprietorship or partnership. However, the benefits of debt financing, such as leverage, remain even with personal taxes taken into account.
Learning Objectives
- Explain the role of debt financing and its impact on firm valuation and cost of capital.