In a world in which only corporate income taxes matter, the optimal capital structure is

Question

Quizplus · Accepted Answer

In a world where only corporate income taxes matter, the optimal capital structure leans towards 99.99% debt financing. This is because interest payments on debt are tax-deductible, reducing the overall tax burden of the company, whereas dividends paid on equity are not deductible. This tax shield provided by debt financing makes high levels of debt more attractive from a tax perspective.

In a World in Which Only Corporate Income Taxes Matter