Question

1. Which of the following firms would be LESS likely to use more debt?

a.   A firm owns many buildings and real estates.

b.   A firm has stable taxable income.

c.   A firm has large agency costs of equity.

4. A firm has used up all other tax saving strategies.

e.   A firm has low-rated (B- rating or below) bonds.

Answer 1

Answer - Option E [ (A firm has low-rated (B- rating or below) bonds.]

Reasons:-

Option A is wrong because if firm owns many buildings and real estates it can take more debt as the buildings and real estate will serve as good source of collateral.

Option B is wrong because if firm has stable taxable income it can take more debt as they can serve their interest cost of debt due to their stable taxable income.

Option C is wrong because if firm has large agency costs of equity it will use debt as it will result in lower cost.

Option D is wrong because if firm has used up all other tax saving strategies it will use debt as debt is a tax saving strategy.