If a firm uses less debt in its capital structure than is optimal, then

Question

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If a firm uses less debt in its capital structure than is optimal, it will pay more in corporate income taxes than is necessary as interest payments on debt are tax-deductible. This means that the firm will have a higher taxable income and therefore pay more in taxes than if it had used the optimal amount of debt in its capital structure. Choices A and C are not necessarily true and are not directly related to the use of debt in the firm's capital structure.

If a Firm Uses Less Debt in Its Capital Structure