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The optimal capital structure will tend to include more debt for firms with A. less taxable...

The optimal capital structure will tend to include more debt for firms with

A. less taxable income. B. lower probability of financial distress. C. substantial tax shields from other sources. D. the lowest marginal tax rate. E. the highest depreciation deductions.

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Answer #1

Correct answer is Option B lower probability of financial distress

Explanation : When firm increases its debt it will have to pay interest to its creditor. With higher increse in debt will lead into risk of non-payment to its creditor- and which may ultimately lead into financial distress.

Fincial distress will lead into bankruptcy of the firm, sale of asset at lower price due to pressure from creditot, higher cost of capital for incremental funding etc.

At optimal capital sturcture level firm increases its debt with maintaining lower probability of financial distress.

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