According to the capital structure theories we examined, a ﬁrm beneﬁts by having debt since the
interest expense is deductible for tax purposes, creating an interest tax shield. The interest tax
shield, on the other hand, increases in value the higher the coupon rate on the debt and the higher
the tax rate. Ignoring ﬁnancial distress costs, shouldn't the ﬁrm then choose to pay as high a
coupon rate as possible?

Question

Quizplus · Accepted Answer

The Answer of According to the capital structure theories we examined, a ﬁrm beneﬁts by having debt since the
interest expense is deductible for tax purposes, creating an interest tax shield. The interest tax
shield, on the other hand, increases in value the higher the coupon rate on the debt and the higher
the tax rate. Ignoring ﬁnancial distress costs, shouldn't the ﬁrm then choose to pay as high a
coupon rate as possible?

According to the Capital Structure Theories We Examined, a ﬁRm