A Trade-Off Between the Benefits of Debt Finance and the Costs

question 29

Multiple Choice

A trade-off between the benefits of debt finance and the costs of financial distress may lead to a company increasing its debt/equity ratio because:

• A)of the low probability of encountering severe financial difficulties.
• B)its existing debt/equity ratio is high.
• C)the expected increase in financial distress is expected to outweigh the tax benefits.
• D)agency costs of equity increase as the level of debt increases.