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 debt can help mitigate these costs by reducing free cash flow and aligning management's interests with those of the shareholders.

The Optimal Debt-Equity Ratio Tends to