If Interaction Effects Make It Difficult for a Firm to Adjust

question 13

Multiple Choice

If interaction effects make it difficult for a firm to adjust its capital structure based on prevailing conditions, then

• A)the firm should target a 50% debt/50% equity capital structure.
• B)the firm should choose the capital structure that will minimize all transaction costs--both direct and indirect.
• C)the firm should use as much debt financing as possible when it is financially healthy in order to benefit from lower corporate taxes.
• D)the firm should use more equity financing than is necessarily optimal today in order to maintain financial flexibility.