1. The interest tax shield (tax deductibility of interest) is a key reason why: the required rate of return on assets rises when debt is added to the capital structure. the value of an unlevered firm is equal to the value of a levered the net cost of debt to a firm is generally less than the cost of equity. the cost of debt is equal to the cost of equity for a levered firm.

the net cost of debt to a firm is generally less than the cost of equity.

Explanation:

If we assume both, investor in firms and lender to firms want's a certain return x

because the lender return (the interest) are tax deductible the net cost of debt will be: x (1 - t)

where t is the tax rate being rate beteen 0 and 1

as 1 less a fraction will be less than 1 we can stablish that:

x > x (1 - t)

x is the cost of equity

while x (1-t) is the net cost of debt

therefore, the cost of debt is lower than cost of equity.