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John Moffat.
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mansoor
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good evening
what is the major advantage of issuing long term debt?
a. increased financial flexibility
b. the reduction in profit before tax
c. decreased financial risk
d. the reduction of shareholder control over the companythe correct answer is B.
i chose C.
i dont get it.
John Moffat
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More long-term debt increases financial risk (see the lectures on gearing) and is therefore not an advantage.
Debt interest reduces the taxable profit, and this is an advantage (less tax payable). (Raising equity finance means more dividends payable, but they are not tax allowable)
mansoor
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ohhh!!
“reduction in profit before tax” means that interest expense has been claimed, thus there will be less tax to pay.. is that it?
John Moffat
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Correct 🙂
mansoor
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