If a firm has the optimal amount of debt, then the: A)direct financial distress costs must equal the present value of the interest tax shield. B)value of the levered firm will exceed the value of the firm if it were unlevered. C)value of the firm is minimized. D)value of the firm is equal to V_L + T_C * D. E)debt-equity ratio is equal to 1.0.

Question

Quizplus · Accepted Answer

If a firm has the optimal amount of debt, it means that it has balanced the benefits of the interest tax shield and the costs of financial distress. At this point, the value of the levered firm will exceed the value of the firm if it were unlevered, indicating that the firm has reached its optimal capital structure.

If a Firm Has the Optimal Amount of Debt, Then