Which of these will occur in a world with taxes and financial distress when a firm is operating at its optimal capital structure?
I.The debt-equity ratio will be optimal.
II.The weighted average cost of capital will be at its minimal point.
III.The required return on assets will be at its maximum point.
IV.The increased benefit from additional debt will equal the increased bankruptcy costs of that debt.
A)I and IV only
B)II and III only
C)I and II only
D)II,III,and IV only
E)I,II,and IV only

Question

Quizplus · Accepted Answer

In an optimal capital structure, the debt-equity ratio is optimal, the WACC is minimized, and the benefit from additional debt equals the increased bankruptcy costs.

Which of These Will Occur in a World with Taxes