Which of the following is true when a firm has level coupon debt outstanding and growth opportunities?
A) The firm should be 100% debt financed because the greater the debt the greater tax shield.
B) 100% debt financing is suboptimal because increased firm value does not increase the current interest needed to shield income today.
C) Firm value will only increase if the debt level is increased to 100%.
D) The high growth firm will have high debt ratios as they need greater financing.

Question

Quizplus · Accepted Answer

100% debt financing is suboptimal for a firm with growth opportunities because it increases the risk of financial distress, which can outweigh the tax shield benefits of debt. Additionally, growth opportunities often require flexibility in financing that high levels of debt can restrict.

Which of the Following Is True When a Firm Has