The optimal capital structure is met when:

Question

Quizplus · Accepted Answer

The optimal capital structure is met when the tax savings from additional leverage are offset by the costs of distress. This means that the benefits of increased debt (such as the interest tax shield) are balanced by the potential costs of financial distress (such as bankruptcy costs, legal fees, and damage to the company's reputation). The goal is to find the right balance between debt and equity financing to maximize the value of the firm. Option A is incorrect as financial distress costs would not decrease with additional borrowing. Option B is incomplete and incomplete information is not provided to verify the correctness of the statement. Option D is incorrect as the value of an all-equity-financed firm is less than the value of a leveraged firm.

The Optimal Capital Structure Is Met When