When bankruptcy is added to the M&M world of capital structure,which of the following statements is true as more debt is added to the financing mix of the company?
A)The interest tax shield is a benefit to equity holders,although they bear increasing risk.
B)The advantage of the tax shield starts to be offset by financial distress costs.
C)The WACC of the company starts to increase past a certain level of debt.
D)All of the above

Question

Quizplus · Accepted Answer

As more debt is added, the interest tax shield benefits equity holders, but financial distress costs and increased WACC can offset these benefits.

When Bankruptcy Is Added to the M&M World of Capital