The optimal debt-equity ratio tends to
A)remain constant when agency costs of equity are considered.
B)support the all-debt capital structure.
C)increase when agency costs of equity exist.
D)be directly related to the costs of financial distress.
E)decrease as the tax rate increases.

Question

Quizplus · Accepted Answer

The optimal debt-equity ratio tends to increase when agency costs of equity exist because higher debt levels can mitigate these costs by reducing the free cash flow available to managers, thus aligning their interests more closely with those of shareholders.

The Optimal Debt-Equity Ratio Tends to