Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure?
A) Its sales become less stable over time.
B) The costs that would be incurred in the event of bankruptcy increase.
C) Management believes that the firm's stock has become overvalued.
D) Its degree of operating leverage increases.
E) The corporate tax rate increases.

Question

Quizplus · Accepted Answer

An increase in the corporate tax rate makes the tax shield on debt more valuable, encouraging firms to use more debt to take advantage of the tax deductibility of interest payments.

Other Things Held Constant, Which of the Following Events Is