Which statement regarding debt is correct,other things held constant?
A)Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs; hence, they tend to use relatively little debt.
B)An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
C)An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.
D)An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.

Question

Quizplus · Accepted Answer

An increase in the corporate tax rate makes debt financing more attractive because interest payments on debt are tax-deductible, which can reduce a company's taxable income and thus its tax liability. This tax shield effect encourages companies to use more debt in their capital structure.

Which Statement Regarding Debt Is Correct,other Things Held Constant