Corporate taxes and costs of financial distress

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Reference no: EM131884295

When there are corporate taxes and costs of financial distress, which of the following statements are true for a firm that initially starts out with no leverage?

A. A firm's Optimal Capital structure will occur where its Weighted Average Cost of Capital is minimized.

B. A firm's Weighted Average Costs of Capital will initially decrease as the firm issues debt and buys back shares of stock due to the present value of interest tax shields. However, at high enough leverage levels, WACC start to increase as expected costs of financial distress start to outweigh tax shield benefits. Submit

C. A firm's Weighted Average Costs of Capital will initially increase as the firm issues debt and buys back shares of stock due to the present value of interest tax shields. However, at high enough leverage levels, WACC start to decrease as expected costs of financial distress start to outweigh tax shield benefits. Submit

D. A firm's equity will become increasingly risky as the firm issues debt and buys back shares of stock. Submit A firm's equity will become less risky as the firm issues debt and buys back shares of stock. Submit

E. A firm's debt will become increasingly risky as the firm issues debt and buys back shares of stock. Submit

F. A firm's Weighted Average Costs of Capital will not vary with leverage as firm value and cost of capital are always independent of capital structure.

Reference no: EM131884295

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