Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?
A) An increase in the personal tax rate.
B) An increase in the company's operating leverage.
C) The Federal Reserve tightens interest rates in an effort to fight inflation.
D) The company's stock price hits a new high.
E) An increase in the corporate tax rate.

Question

Quizplus · Accepted Answer

An increase in the corporate tax rate makes debt more attractive because interest payments are tax-deductible, thus encouraging a company to raise its target debt ratio.

Which of the Following Events Is Likely to Encourage a Company