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In general, U.S. firms: Multiple Choice tend to overweigh debt in relation to equity. that are...

In general, U.S. firms:

Multiple Choice

  • tend to overweigh debt in relation to equity.

  • that are highly profitable tend to have lower target debt-equity ratios than unprofitable firms.

  • tend to maintain similar capital structures across all industries.

  • tend to maximize the use of every dollar of the tax benefits of debt.

  • that are family-owned tend to have very low levels of debt.

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Answer #1

Answer :- Option B). that are highly profitable tend to have lower target debt-equity ratio than unprofitable firms.

Explanation :- The firms which are profitable will utilize its own funds in business rather than borowed funds (like for future investment decision, if any). The profitable firms will not borrow funds more as they are having sufficient equity (owners' funds), thereby, resulting in lesser debt presence in the business. Due to less debt, Target debt equity ratio will also be lesser for profitable firms.

The firms which are not in profit making position, will borrow more funds from outsiders as they are not having sufficient own funds, accordingly, Target debt-equity ratio will be higher for unprofitable firms (as compared to lesser debt-equity ratio for the profitable firms).

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