A major factor in determining the optimal capital structure is:
A) the trade-off between the interest rate costs of debt and the possible bankruptcy costs associated with equity.
B) the trade-off between the tax advantage of debt and the possible bankruptcy costs associated with equity.
C) the trade-off between the tax advantage of debt and the possible bankruptcy costs associated with debt.
D) the trade-off between the interest rate costs of equity and the possible bankruptcy costs associated with equity.

Question

Quizplus · Accepted Answer

The correct answer is C because it highlights the trade-off between the tax advantages of debt (since interest payments on debt are tax-deductible, reducing the overall tax burden) and the potential bankruptcy costs associated with taking on too much debt, which can increase the risk of financial distress.

A Major Factor in Determining the Optimal Capital Structure Is