With corporate taxes but no personal taxes,a firm's optimal capital structure is the one in which _____.

Question

Quizplus · Accepted Answer

In a scenario where corporate taxes but no personal taxes are present, a firm's optimal capital structure would be one that maximizes debt because the interest paid on debt is tax-deductible, which in turn reduces the firm's tax liabilities. Therefore, the answer is C, where enough debt is included to completely eliminate the firm's tax liabilities. This would result in a higher return to the shareholders due to the tax benefit of the firm's debts.

With Corporate Taxes but No Personal Taxes,a Firm's Optimal Capital