What three factors are important to consider in determining a target debt to equity ratio?
A) Taxes, asset types, and pecking order and financial slack
B) Asset types, uncertainty of operating income, and pecking order and financial slack
C) Taxes, financial slack and pecking order, and uncertainty of operating income
D) Taxes, asset types, and uncertainty of operating income
E) None of these.

Question

Quizplus · Accepted Answer

Taxes are important to consider because interest payments on debt are tax deductible, while dividend payments on equity are not. Asset types are also important as some assets, such as property and equipment, may be better financed with debt. Finally, uncertainty of operating income is important because a high debt to equity ratio can increase the company's financial risk if the company is unable to generate enough cash flow to make interest payments on its debt. Pecking order and financial slack are also factors to consider, but are not as important as the other three factors listed in answer choice D.

What Three Factors Are Important to Consider in Determining a Target