The optimal capital structure depends on ________ such as taxes, distress costs and agency costs.
A)market imperfections
B)firm specific risks
C)capital market factors
D)systematic risks

Question

Quizplus · Accepted Answer

The optimal capital structure depends on market imperfections such as taxes, distress costs, and agency costs. Taxes, for example, make debt more attractive than equity because interest payments on debt are tax-deductible, while dividends on equity are not. Distress costs refer to the present value of the costs that would arise if the firm were to default on its debt payments. Finally, agency costs refer to the costs that arise from conflicts of interest between a firm's owners and its managers. All of these factors can affect a firm's capital structure and make it difficult to determine an optimal mix of debt and equity financing.

The Optimal Capital Structure Depends on ________ Such as Taxes