Which one of the following statements is correct?
A) The greater the volatility of EBIT, the more a ﬁrm should borrow.
B) Firms with a large percentage of assets invested in intangibles, should borrow more than a comparable ﬁrm with a minimal investment in intangibles.
C) A ﬁrm with a high annual depreciation write-off beneﬁts more from leverage than a comparable ﬁrm with a low annual depreciation write-off.
D) The static model of capital structure identiﬁes the precise debt-equity ratio that optimizes the value of the ﬁrm.
E) Firms with high tax rates have a greater incentive to borrow than ﬁrms with low tax rates.

Question

Quizplus · Accepted Answer

Firms with high tax rates have a greater incentive to borrow than firms with low tax rates because they can deduct interest expenses from their taxable income, which reduces their tax liability. This makes borrowing more attractive for high-tax firms, as it results in a greater tax shield.

Which One of the Following Statements Is Correct