7. Capital structure theory A Aa allowed to deduct interest payments as an expen

Question

7. Capital structure theory A Aa allowed to deduct interest payments as an expense. Corporations allowed to deduct dividend payments to Corporabions stockholders as an expense. The diferential tax treatment of iwtéerest payments and dividend paymerts encourages firms to use capital structure. Debt fnancing is ciferential tax treatment of interest payments and dividend payments encourages use in their expensive than common ar prefered stock finanoing y currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding Green Goase Automabion Company equity. The firm's ur evered beta is cost cf capital (WACC) also equals 11.40%. The nsk-free rateof interest (rw) is 3%, and the market na prenium (apj is 7%. Coen Goes, marginal tax rate is 30%. 1.2, and its cost of equity is 11.40%. Because the firm has no debt in its capital structure, its weighted average

Explanation / Answer

Corporations are allowed to deduct interest payments as an expense. Corporations are not allowed to deduct dividend payments to stockholders as an expense. The differential tax treatment of interest payments and dividend payments enoourages firms to use debt in their
capital structure. Debt financing is not expensive than common or preferred stock financing.

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