If the present value of the interest tax shield equals the present value of the costs of financial distress, then the:
A) firm is using the optimal level of debt.
B) firm is paying too high an interest rate.
C) firm's market value equals its book value.
D)firm should increase its use of debt.

Question

Quizplus · Accepted Answer

If the present value of the interest tax shield is equal to the present value of the costs of financial distress, it means that the firm has found the optimal level of debt. Any deviation from this level, either increasing or decreasing the use of debt, would decrease the firm's overall value. Therefore, the firm is using the optimal level of debt.

If the Present Value of the Interest Tax Shield Equals