Financial distress costs apply to firm

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Reference no: EM131594627

Assume both corporate taxes and financial distress costs apply to a firm. Given this, the static theory of capital structure illustrates that:

1) a firm's value and its tax rate are inversely related.

2) the value of a firm rises as the interest rate on debt rises.

3) the maximum value of a firm is obtained when a firm is financed solely with debt.

4) a firm's value and its weighted average cost of capital are inversely related.

5) the value of a firm rises as both the interest rate on debt and the tax rate rise.

Reference no: EM131594627

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