Of the following, all are conclusions that can be drawn from the capital structure puzzle EXCEPT:
A) In the framework of the static theory of capital structure, a ﬁrm can precisely identify its optimal capital structure.
B) Firms with tax shields from other sources such as depreciation will beneﬁt less from leverage.
C) Firms in lower tax brackets will tend to beneﬁt less from increases in ﬁnancial leverage.
D) The ﬁnancial structure that minimizes WACC is the one that will maximize the value of the ﬁrm.
E) All else the same, ﬁrms with tangible, liquid assets will have an incentive to borrow more.

Question

Quizplus · Accepted Answer

The conclusion that a firm can precisely identify its optimal capital structure is false based on the capital structure puzzle. The puzzle highlights that there are various factors at play, such as tax shields and the cost of financial distress, that make it difficult for firms to identify their optimal capital structure.

Of the Following, All Are Conclusions That Can Be Drawn