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Corporate Income Tax - Equity and Debt Finance

How can the corporate income tax, as administered in the United States, affect the choice between equity and debt finance?

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There is one main point that distinguishes the advantages of debt/equity financing in regards to corporate taxation, and that has to do with total expenses. In the U.S., a corporation is taxed based on their net profit. This includes all expenses from the company. When the company finances with debt are in the form of loans, credit lines, and other means, the company is able to use the interest expense incurred on the debt throughout the accounting period ...

Solution Summary

This solution explains how the corporate income tax affects the choice between equity and debt financing. A comprehensive discussion is provided.