Ignore financial distress costs.When [(1 − T_C)× (1 − T_S)= (1 − T_B)],then firms: A)should be all-equity financed. B)need to maintain a debt-equity ratio of .5. C)tend to be indifferent between issuing debt or issuing equity. D)discover that both dividends and interest payments are non-deductible business expenses. E)can reduce their taxes by increasing their dividend payouts.

Question

Quizplus · Accepted Answer

When the left side of the equation [(1 − T_C)× (1 − T_S)] is equal to the right side of the equation (1 − T_B), the firm is indifferent between issuing debt or issuing equity. This means that the firm does not receive any tax benefits or costs from issuing debt or equity, and can choose either financing option based on other factors such as cost, risk, and availability. Therefore, the best choice is C, tend to be indifferent between issuing debt or issuing equity.

Ignore Financial Distress Costs