Solution
Option 1 -> High flexibility in dividend payments: This relates to equity, not debt. Debt requires fixed interest payments, reducing flexibility.
Option 2 -> Increased control for existing shareholders: While debt doesn't dilute ownership, this is a secondary benefit, not the primary advantage.
Option 3 -> Lower financial risk: Incorrect. Debt actually increases financial risk due to mandatory interest and principal repayment obligations.
Option 4 -> Tax deductibility of interest payments: Interest on debt is tax-deductible, reducing the effective cost of borrowing and providing a tax shield benefit.
Hence, Option 4: Tax deductibility of interest payments -> Interest payments on debt are treated as business expenses and are tax-deductible, which lowers the company's taxable income and reduces the after-tax cost of debt financing. This tax shield is a primary advantage that makes debt financing attractive compared to equity financing -> correct
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