Write a two-page paper discussing why the optimal level of leverage from a tax-saving perspective is the level at which interest equals EBIT. Mention why is there a personal tax disadvantage of debt and its effect, if any, in the value of leverage for the firm.

answer the following questions:
a. Why do firms prefer debt to equity?
b. Do you agree with the following statement: “Low level of leverage is unique to US
firms”. Explain your reasons.

Answer preview

According to Fernandez, (2017), firms take advantage of tax incentives by borrowing money from other institutions or shareholder.  On the other hand, firms acquire properties on credit whereby they pay over a given time.  Borrowing helps the business to finance its operation as well as purchasing assets which will be used in the production of goods and services.

Optimal tax – saving the perspective

According to Irianto, Wafirli, & Sudibyo, (2017), the level of profits which the firms get is taxable, and this form of tax is regarded as a corporate tax.  Similarly, the interests’ expense relieves the tax burden to the business.  Interest expenses reduce the amount of the corporate tax that the company pays to the state or federal…

 

(700 words)