At moderate debt levels the probability of financial distress is trivial and therefore the tax advantages of debt dominate.

Question

Quizplus · Accepted Answer

At moderate debt levels, the probability of financial distress is low, which means that the tax advantages of debt (such as deductibility of interest payments) outweigh the potential costs of financial distress. Therefore, companies may choose to leverage their capital structure with debt financing.

At Moderate Debt Levels the Probability of Financial Distress Is