The optimal capital structure is a function of ____.
A) corporate income taxes
B) financial distress costs
C) agency costs
D) corporate income taxes, financial distress costs, and agency costs

Question

Quizplus · Accepted Answer

The optimal capital structure is a function of corporate income taxes, financial distress costs, and agency costs. Corporate income taxes affect debt usage as interest payments are tax-deductible. Financial distress costs occur when a firm is unable to meet its debt obligations and must declare bankruptcy, leading to costs such as legal fees and lost business. Agency costs arise due to conflicts of interest between shareholders and managers, which can lead managers to choose suboptimal capital structures. Therefore, all three factors must be considered when determining the optimal capital structure.

The Optimal Capital Structure Is a Function of ____