In a world with taxes and financial distress,when a firm is operating with the optimal capital structure: I. the debt-equity ratio will also 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 is equal to 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

When a firm operates with the optimal capital structure, the debt-equity ratio is optimal (I), the WACC is minimized (II), and the benefits of additional debt equal the increased bankruptcy costs (IV).

In a World with Taxes and Financial Distress,when a Firm