Module 8: Long Answer Questions

For students

Last updated: 08/01/2026 17:19

The questions are based on or inspired by the following references:

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📙 Part 2 (Midterm to Final)

Module	Chapter
8	ch15

Answer the following questions based on the discussions in class.

Q1.

Explain how corporate taxes create an incentive for firms to use debt financing. In your answer, describe how the interest tax shield affects firm value.

Q2.

Discuss how personal taxes on interest and equity income can offset the corporate tax advantage of debt. What determines the net tax benefit of leverage in this case?

Q3.

Explain why the value of the interest tax shield depends on the firm’s expected taxable income. What happens to this benefit when a firm reports operating losses?

Q4.

Discuss how changes in the corporate tax rate influence a firm’s optimal debt policy. Provide examples of how firms might adjust their leverage following a major tax reform.

Q5.

Explain how tax incentives for debt financing can influence firms’ capital structures over time. Why might some firms still choose to maintain low levels of debt despite these incentives?

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