In analyzing the value of a firm as a function of capital structure, the present value of the tax shield benefit is offset by the present value of the expected ____, resulting in an interior optimal capital structure.
A) financial distress costs
B) agency costs
C) holding costs
D) financial distress costs and agency costs

Question

Quizplus · Accepted Answer

The present value of the tax shield benefit is offset by the present value of both the expected financial distress costs and agency costs, according to trade-off theory in capital structure analysis. This balance between benefits and costs leads to an optimal capital structure.

In Analyzing the Value of a Firm as a Function