Securities issued by corporations may be classified roughly as equity securities or debt securities. The main differences between debt and equity are the following:

• Debt is not an ownership interest in the Creditors do not generally have voting power.
• The corporation’s payment of interest on debt is considered a cost of doing business and is fully tax deductible. Dividends paid to stockholders are not tax deductible.
• Unpaid debt is a liability of the If it is not paid, the creditors can legally claim the assets of the firm. This action can result in liquidation or reorganization, two of the possible consequences of bankruptcy. Thus, one of the costs of issuing debt is the possibility of financial failure. This possibility does not arise when equity is issued.

As can also be understood from the information given, the statements in the options; I, II, III and V are correct, so the correct answer is D. The statement “Dividends paid to stockholders are tax deductible.” is not correct, because dividends paid to stockholders are not tax deductible.