At some debt-equity ratio,the costs of financial distress are expected to overcome the value of the tax shield for a firm.

Question

Quizplus · Accepted Answer

This is known as the "optimal capital structure" and varies from company to company based on their operations and risk levels. Beyond this ratio, the costs of financial distress such as bankruptcy and defaulting on loans outweigh the benefits of the tax shield from debt.

At Some Debt-Equity Ratio,the Costs of Financial Distress Are Expected