A firm's debt to equity ratio varies at times because

Question

Quizplus · Accepted Answer

A firm's debt to equity ratio varies at times because a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run. This means that a firm will raise debt or equity depending on the market conditions and the cost associated with raising the funds. Therefore, the debt to equity ratio is not fixed and may vary depending on the firm's requirements and market conditions. The other options are not entirely correct as firms prefer to sell equity when share prices are high and bonds when interest rates are low. Additionally, the market does penalize firms for high debt to equity ratios by charging a higher cost of capital.

A Firm's Debt to Equity Ratio Varies at Times Because