CIMA F3 Practice Questions - CIMA F3 Financial Strategy Exam

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A government imposes corporation tax at 25% with tax relief on debt interest. Holding all else equal, what is the most direct financial-strategy effect of this tax relief on a company's choice of financing?

It increases the cost of debt above the cost of equity It creates an incentive to issue more equity because dividends become deductible It has no effect on the cost of capital It creates an incentive to use more debt because interest is tax-deductible

Correct Answer:

It creates an incentive to use more debt because interest is tax-deductible

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