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Homework answers / question archive / The major reason why many corporations rely heavily on bonds to finance their operations is/are (2 Points) the interest paid by the corporation to investors is tax deductible to the corporation
The major reason why many corporations rely heavily on bonds to finance their operations is/are (2 Points) the interest paid by the corporation to investors is tax deductible to the corporation. the amount of funds a corporation can obtain by issuing bonds is unlimited by its ability to make the coupon payments. equity financing offer the same tax advantage because it does not involve interest payments. all of the above
Answer- a.) The interest paid by the corporation to investors is tax deductible to the corporation.
Reason- The corporations often prefer to raise capital through bonds to finance their operations because bond financing is less expensive than equity and the interest paid to the investors by the corporation is tax deductible. Issuing equity doesn’t offer any tax saving benefits because corporations distribute dividends to investors in case of equity financing, which are profits and are not tax-deductible. So, equity financing doesn’t offer the same tax advantage as bond financing offer. The amount of funds a corporation can obtain by issuing bonds is not unlimited.
