Question

Which of the following is FALSE regarding the difference between debt and common stock? A. Equity is ownership in a firm but debt is not. B. Stockholders have voting power while creditors do not. C. Periodic payments made to both are tax deductible for the company. D. Interest payments are usually legally binding while dividend payments generally are not. E.

Answer 1

Answer:

C. Periodic payments made to both are tax deductible for the company.

Explanation:

Interest expense is tax deductible and dividends are not tax deductible.

This is because, interest is an expense charged to income statement and paid on debt, which is a compulsory payment.

Whereas, when we discuss about payment of dividend it is paid as part of retained earnings, as this is paid from retained earnings which is balance of net income added after tax to retained earnings.

Therefore, the statement which is false

C. Periodic payments made to both are tax deductible for the company.