Assume both corporate taxes and financial distress costs apply to a firm. Given
ID: 2776831 • Letter: A
Question
Assume both corporate taxes and financial distress costs apply to a firm. Given this, the tradeoff theory of capital structure illustrates that
A firm's value and its weighted average cost of capital are inversely related
A firm's value and its tax rate are inversely related
The maximum value of a firm is obtained when a firm is financed solely with debt
The value of a firm rises as the interest rate on debt rises
The value of a firm rises as both the interest rate on debt and the tax rate rise
Assume both corporate taxes and financial distress costs apply to a firm. Given this, the tradeoff theory of capital structure illustrates that
A
A firm's value and its weighted average cost of capital are inversely related
BA firm's value and its tax rate are inversely related
CThe maximum value of a firm is obtained when a firm is financed solely with debt
DThe value of a firm rises as the interest rate on debt rises
EThe value of a firm rises as both the interest rate on debt and the tax rate rise
Explanation / Answer
Option-A is correct.
The trade off theory of capital structure illustrate that " a firm's value and its weighted average cost of capital are inversely related.
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