Which of the following statements is correct? Group of answer choices Since companies can deduct...
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Accounting
Which of the following statements is correct? Group of answer choices Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies debt ratios to be lower than they would be if interest and dividends were both deductible. Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations. If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant. There are no tax advantages for corporations that issue bonds and make coupon payments. The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.
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