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28 January, 10:51

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. True False

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  1. 28 January, 11:04
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    Answer: False

    Explanation:

    Interest paid by Corporations on debts are already a tax deductible expense. If laws were changed allowing $0.5 out of every $1.00 to be tax deductible, that would mean that $0.5 would still have to be paid tax on. That would mean that Corporations now have to pay more taxes because current tax laws allow for every $1 of interest (100%) to be tax deductible.

    It is therefore unlikely that Corporations would borrow more.

    If you require any clarification do react or comment.
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