When Graphing fiRm Value Against Debt Levels, the Debt Level

question 8

Multiple Choice

When graphing firm value against debt levels, the debt level that maximizes the value of the firm is the level where:

• A)the increase in the present value of distress costs from an additional pound of debt is greater
• Than the increase in the present value of the debt tax shield.
• B)the increase in the present value of distress costs from an additional pound of debt is equal
• To the increase in the present value of the debt tax shield.
• C)the increase in the present value of distress costs from an additional pound of debt is less
• Than the increase of the present value of the debt tax shield.
• D)distress costs as well as debt tax shields are zero.
• E)distress costs as well as debt tax shields are maximized.

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