Which of the following statements about the choice of a capital structure is (are)true?
A)Firms seem to like to have a capital structure that is similar to that of their peers.
B)Firms with more volatile underlying assets use more debt financing.
C)Firms with lower corporate tax rates tend to issue more debt than those with higher corporate tax rates.
D)Both B and C are true statements.

Question

Quizplus · Accepted Answer

Firms often mimic the capital structure of their peers to maintain competitive parity and because they perceive similar structures as industry standards. Statement B is incorrect because firms with more volatile assets typically use less debt to avoid the risk of financial distress. Statement C is also incorrect as firms with higher corporate tax rates are more likely to issue debt to take advantage of the tax shield provided by interest deductions.

Which of the Following Statements About the Choice of a Capital