Which one of the following is a safe assumption for a firm in which the PV of the tax shield is approximately equal to the PV of the financial distress costs?
A) The tax shield has been calculated incorrectly.
B) The firm is too heavily levered.
C) The firm has reached its optimal debt level.
D)The firm appears to have a low risk of financial distress.

Question

Quizplus · Accepted Answer

When the present value of tax shield is equal to the present value of financial distress costs, it suggests that the firm has reached an optimal level of debt that maximizes the benefits of tax shield against the costs of financial distress. Thus, it is safe to assume that the firm has an appropriate level of leverage and does not appear to have a high risk of financial distress.

Which One of the Following Is a Safe Assumption for a Firm