Which of the following events is likely to encourage a company to raise its target debt ratio,other things held constant?
A) An increase in the corporate tax rate.
B) An increase in the personal tax rate.
C) An increase in the company's operating leverage.
D) The Federal Reserve tightens interest rates in an effort to fight inflation.
E) The company's stock price hits a new high.

Question

Quizplus · Accepted Answer

An increase in the corporate tax rate encourages companies to raise their target debt ratio because interest payments on debt are tax-deductible, which can reduce the company's taxable income and thus its tax liability. This makes debt financing more attractive relative to equity financing.

Which of the Following Events Is Likely to Encourage a Company