The Optimal Capital Structure Is Met When

question 2

Multiple Choice

The optimal capital structure is met when:

• A) additional borrowing results in lower financial distress costs.
• B) additional borrowing is offset by the interest tax shield.
• C) the tax savings from additional leverage are offset by the costs of distress.
• D) the present value of the tax shield is greater than the value of an all-equity-financed firm.

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Definitions:

Total Costs

The sum of all expenses incurred in the production of goods or services, including fixed and variable costs.

Total Revenue

The overall income generated by a firm from its sales activities before any costs or expenses are subtracted.

Normal Return

The minimum profit necessary for a company to remain in business, often equated to covering opportunity costs.

Total Fixed Costs

The sum of all costs required to produce any output, assuming they remain constant regardless of the level of production.