National Evaluation Series (NES) Business Studies Practice Test 2025 - Free Business Studies Practice Questions and Study Guide

Using long-term debt for expansion provides several advantages, one of which is the ability to make interest payments tax-deductible. This tax benefit allows businesses to reduce their taxable income, leading to lower overall tax liabilities. When companies take on long-term debt, the interest they pay on that debt can be subtracted from their earnings before tax, providing a financial advantage over issuing common stock, where no such deduction is available for shareholders.

This aspect of long-term debt can make it an attractive option for firms seeking to finance expansion while managing their cash flows effectively. By leveraging debt, businesses can maintain ownership control without diluting existing shareholders' equity through the issuance of new common stock. Additionally, interest payments, which are an obligation, are often predictable and can be strategically planned within a company’s budget as opposed to the uncertainties associated with shareholder expectations and dividend payouts. Overall, tax-deductible interest payments make long-term debt a favorable choice for businesses pursuing growth.