Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?
A) The costs that would be incurred in the event of bankruptcy increase.
B) Management believes that the firm's stock has become overvalued.
C) Its degree of operating leverage increases.
D) The corporate tax rate increases.
E) Its sales become less stable over time.

Question

Quizplus · Accepted Answer

When the corporate tax rate increases, the tax shield provided by debt also increases. This makes debt a more attractive source of financing, as the interest payments are tax-deductible, which decreases the firm's tax liability.

Other Things Held Constant, Which of the Following Events Is