What is the main benefit of financial leverage (debt financing) for tax-paying corporations?

Explanation

Core Concept: Interest paid on corporate debt is tax-deductible, creating an ‘Interest Tax Shield’ = Interest Expense × Corporate Tax Rate. Dividends paid to equity holders are not tax-deductible. Context/Distractors: Debt increases bankruptcy risk; leverage does not lower interest payments or exempt firms from filings. Exam Tip/Key Fact: The interest tax shield lowers the effective after-tax cost of debt: Kd(after-tax) = Kd(before-tax) × (1 − T).