Question

Which of the following statements is FALSE?
A.The tax deductibility of interest lowers the effective cost of debt financing for the firm.
B.When a firm uses debt financing, the cost of the interest it must pay is offset to some extent by the tax savings from the interest tax shield.
C. With tax-deductible interest, the effective after-tax borrowing rate is r(τC).
D.The WACC represents the cost of capital for the free cash flow generated by the firm’s assets.

Answer 1

The statement that is false in this group is that: When a firm uses debt financing, the cost of the interest it must pay is offset to some extent by the tax savings from the interest tax shield.

What is debt financing?

This is a situation that arises due to the fact that a firm is selling debt instruments to their investors. The reason they are selling is to raise money.

The instruments that are being sold would be

• bonds
• bills
• notes

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