The optimal capital structure will tend to include more debt for firms with:
A) The highest depreciation deductions.
B) The lowest marginal tax rate.
C) Substantial tax shields from other sources.
D) Lower probability of financial distress.
E) Less taxable income.

Question

Quizplus · Accepted Answer

Firms with a lower probability of financial distress can afford to take on more debt, as they are less likely to face bankruptcy costs, making debt a more attractive option due to the tax shield benefits.

The Optimal Capital Structure Will Tend to Include More Debt