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Which of the following statements regarding capital structure is (are) correct when capital markets are imperfect? Please consider all types of imperfections covered in the course materials. Choose all correct answer(s). At the optimal level of debt, the firm uses up all tax benefits of debt (or, borrow until interest expenses equate to EBIT). O Firms with high R&D expenditures and future growth opportunities typically maintain low debt levels. Firms with high levels of tangible assets (like airlines) are likely to have low financial distress costs because the assets can be liquidated for close to their full value. As a firm borrows more, its financial distress cost decreases first and starts to increase after the firm's leverage exceeds the optimal level.

Which of the following statements regarding capital structure is (are) correct when capital markets are imperfect? Please consider all types of imperfections covered in the course materials. Choose all correct answer(s). At the optimal level of debt, the firm uses up all tax benefits of debt (or, borrow until interest expenses equate to EBIT). O Firms with high R&D expenditures and future growth opportunities typically maintain low debt levels. Firms with high levels of tangible assets (like airlines) are likely to have low financial distress costs because the assets can be liquidated for close to their full value. As a firm borrows more, its financial distress cost decreases first and starts to increase after the firm's leverage exceeds the optimal level.

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Which of the following statements regarding capital structure is (are) correct when capital markets are imperfect? Please consider all types of imperfections covered in the course materials. Choose all correct answer(s). At the optimal level of debt, the firm uses up all tax benefits of debt (or, borrow until interest expenses equate to EBIT). Firms with high R&D expenditures and future growth opportunities typically maintain low debt levels. Firms with high levels of tangible assets (like airlines) are likely to have low financial distress costs because the assets can be liquidated for close to their full value. As a firm borrows more, its financial distress cost decreases first and starts to increase after the firm's leverage exceeds the optimal level.
Transcribed Image Text:Which of the following statements regarding capital structure is (are) correct when capital markets are imperfect? Please consider all types of imperfections covered in the course materials. Choose all correct answer(s). At the optimal level of debt, the firm uses up all tax benefits of debt (or, borrow until interest expenses equate to EBIT). Firms with high R&D expenditures and future growth opportunities typically maintain low debt levels. Firms with high levels of tangible assets (like airlines) are likely to have low financial distress costs because the assets can be liquidated for close to their full value. As a firm borrows more, its financial distress cost decreases first and starts to increase after the firm's leverage exceeds the optimal level.
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