How does the deductibility of interest and dividend by the paying corporations affect the choice of financing ( i.e use of debt vs. equity)
belongs to book: FUNDAMENTALS OF FINANCIAL MANAGEMENT|Eugene F.Brigham, Joel F. Houston|12th Edition| Chapter number:3| Question number:10
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Accounting
Because interest paid is tax deductible but dividend payments are not, the after-tax cost of debt is lower than the after-tax cost of equity. This encourages the use of debt rather than equity. This point is discussed in detail in Chapters 10 and 14.
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