An investment banker is advising a manufacturing company that currently has no debt but is considering issuing bonds to finance a factory expansion. Which of the following is a primary benefit of using debt over equity for this purpose?

1. ADebt holders participate in the upside of the company’s earnings growth.
2. BIssuing debt will increase the number of shares outstanding, diluting existing shareholders.
3. CDebt financing permanently increases the company’s equity base.
4. DDebt interest payments are tax-deductible, reducing the company's effective cost of capital.✓ Correct answer

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