Which of the Following Statements Is MOST Correct Concerning a Corporation's

question 64

Multiple Choice

Which of the following statements is MOST correct concerning a corporation's optimal capital structure?

• A) The optimal capital structure maximizes the present value of the interest tax shield.
• B) The optimal capital structure occurs at the point where the market value of the levered firm is maximized.
• C) The optimal capital structure minimizes the present value of financial distress costs and agency costs.
• D) The optimal capital structure occurs where the present value of the interest tax shield equals the present value of the firm's bankruptcy costs.

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Definitions:

Long-term Debt

Debt that is not due within the next year and is often used to purchase or invest in significant assets or finance ongoing operations.

Indirect Approach

A method used in accounting to prepare the cash flow statement, where non-cash activities are adjusted to net income to calculate cash flow from operating activities.

Direct Approach

A method of communication in which the main point or message is presented at the beginning, followed by supporting details.