Which one of the following statements is correct?
A) The greater the volatility of EBIT, the more a firm should borrow.
B) Firms with a large percentage of assets invested in intangibles, should borrow more than a comparable firm with a minimal investment in intangibles.
C) A firm with a high annual depreciation write-off benefits more from leverage than a comparable firm with a low annual depreciation write-off.
D) The static model of capital structure identifies the precise debt-equity ratio that optimizes the value of the firm.
E) Firms with high tax rates have a greater incentive to borrow than firms with low tax rates.

Question

Quizplus · Accepted Answer

Firms with high tax rates benefit more from borrowing because the interest payments on debt are tax-deductible, reducing the firm's taxable income and thus its tax liability. This makes debt financing more attractive for firms in higher tax brackets.

Which One of the Following Statements Is Correct