Asked by Cassandra Ramirez on Jul 16, 2024
Verified
Which event is likely to encourage a company to raise its target debt ratio,other things held constant?
A) an increase in the corporate tax rate
B) an increase in the personal tax rate
C) an increase in the company's operating leverage
D) the company's stock price hitting a new high
Corporate Tax Rate
The percentage of a corporation's profit that is paid to the government as tax.
Debt Ratio
An indicator measuring a corporation's use of borrowing, obtained by dividing the sum of all liabilities by the sum of all assets.
- Pinpoint the variables affecting an organization's decision to change its debt proportion and grasp the essential principle of the trade-off theory.
- Evaluate the influence of capital allocation on a corporation's weighted average cost of capital (WACC) and its valuation.
Verified Answer
DT
Destiny ThompsonJul 19, 2024
Final Answer :
A
Explanation :
An increase in the corporate tax rate makes debt financing more attractive because interest payments on debt are tax-deductible, effectively reducing the cost of borrowing. This tax shield encourages companies to increase their target debt ratio to capitalize on the tax benefits.
Learning Objectives
- Pinpoint the variables affecting an organization's decision to change its debt proportion and grasp the essential principle of the trade-off theory.
- Evaluate the influence of capital allocation on a corporation's weighted average cost of capital (WACC) and its valuation.