Which of the following statements are correct?
A) The tax deductibility of debt becomes more important to firms with large non-debt tax shields such as foreign tax credits granted by the U.S. government to firms that pay taxes to foreign governments.
B) As the debt/total asset ratio falls, or as earnings become less volatile, the firm will face lower borrowing costs, driven down by bond investors requiring lower yields to compensate for less risk.
C) The static tradeoff hypothesis states that firms will balance the advantages of equity (its lower cost and tax-deductibility of dividends) with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs).
D) Agency costs increase the optimal level of debt financing for a firm above the level that would be appropriate if agency costs were zero.

Question

Quizplus · Accepted Answer

- Statement B is correct because it describes how a lower debt/total asset ratio or less volatile earnings can lead to lower borrowing costs for a firm. This is because bond investors perceive less risk and therefore require lower yields as compensation.

Which of the Following Statements Are Correct