If the Present Value of the Interest Tax Shield on Debt

question 26

Multiple Choice

If the present value of the interest tax shield on debt equals the present value of the costs of financial distress,then the trade-off theory implies that the:

• A) firm is using the optimal level of debt.
• B) firm is paying too high an interest rate.
• C) firm's market value equals its book value.
• D) firm should increase its use of debt.

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Definitions:

Essential Resource

A resource considered vital for the survival of an economy or the operation of a business.

Long Run

A period in economics sufficient for all markets to adjust, including production levels, prices, and resource allocation, often contrasted with the short run where some factors are fixed.

Efficient Output

The level of production at which a firm or economy is producing at minimum average total cost, optimizing resource use.

Demand Curve

a graph showing the relationship between the price of a good and the quantity of that good which consumers are willing to purchase at various prices.