Interest coverage ratio Consider a firm with a constant interest coverage ratio (k): Interest paid in Year t k FCF If taxes are the only imperfection, which is the optimal k? a) 0.5 b) 0 c) 1 d) as high as possible
Interest coverage ratio Consider a firm with a constant interest coverage ratio (k): Interest paid in Year t k FCF If taxes are the only imperfection, which is the optimal k? a) 0.5 b) 0 c) 1 d) as high as possible
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Why is the optimal interest coverage ratio equal to 1 if taxes are the only imperfection?
Transcribed Image Text:Interest coverage ratio
Consider a firm with a constant interest coverage ratio (k):
Interest paid in Year t k FCF
If taxes are the only imperfection, which is the optimal k?
a) 0.5 b) 0 c) 1 d) as high as possible
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