Of the following, all are conclusions that can be drawn from the capital structure puzzle EXCEPT:
A) In the framework of the static theory of capital structure, a firm can precisely identify its optimal capital structure.
B) Firms with tax shields from other sources such as depreciation will benefit less from leverage.
C) Firms in lower tax brackets will tend to benefit less from increases in financial leverage.
D) The financial structure that minimizes WACC is the one that will maximize the value of the firm.
E) All else the same, firms with tangible, liquid assets will have an incentive to borrow more.

Question

Quizplus · Accepted Answer

The capital structure puzzle is a term used to describe the complexities and uncertainties surrounding the best choice of capital structure for a firm. The statement that a firm can precisely identify its optimal capital structure (A) is not a conclusion that can be drawn from the capital structure puzzle. In fact, the puzzle suggests that there is no clear, one-size-fits-all answer to what the optimal capital structure is, as it can be influenced by many factors such as taxes, bankruptcy costs, agency costs, and asymmetric information.

Of the Following, All Are Conclusions That Can Be Drawn