The Supply Depot is considering issuing $1 million in bonds but their financial staff has advised that if they do,the value of the firm will decrease.Given this advice,you know the staff believes the firm:
A)currently is all-equity financed and adding debt will cause a decrease in firm value.
B)wants to issue too few bonds to obtain the most benefit from debt.
C)will suffer from a decrease in its WACC if the bonds are issued.
D)is at,or has exceeded,its optimal debt-equity ratio.
E)will realize greater tax benefits by issuing equity securities.

Question

Quizplus · Accepted Answer

The financial staff's advice that the firm's value will decrease if they issue bonds suggests that the firm may have already reached its optimal debt-equity ratio. Adding more debt would cause the firm's value to decrease, indicating that the firm may have already taken on as much debt as it can handle.

The Supply Depot Is Considering Issuing $1 Million in Bonds