[strongryne]

It would be great if someone could help me understand the reasoning behind this question.

The benefits of debt financ8ng over equity financing are likely to be the highest in which of the following situations?

A. Low marginal tax rates and many non interest tax benefits.
B. High marginal tax rates and few non interest tax benefits.
C. Low marginal tax rates and few non interest tax benefits.
D. High marginal tax rates and many non interest tax benefits.

The answer is Brad, and the explanation given is that interest is tax deductible. I realize that, but wouldn’t it be better if you paid less interest to begin with? I realize there is an error in my understanding of this question, but can’t wrap my head around it.

[jbergmann1]

It makes sense to pay more interest with higher taxes because it saves you more in taxes. With equity financing the dividends are not deductible for tax purposes.

Passed all 4 parts of the CPA exam!
License application in progress

[Author]

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