Question

Other things held constant, which of the following events is most likely to encourage a firm to increase the amount of debt in its capital structure? Select one: a. The costs that would be incurred in the event of bankruptcy increase. b. Management believes that the firm's stock has become overvalued. c. Its degree of operating leverage increases. d. The corporate tax rate increases. e. Its sales become less stable over time.

Answer 1

Answer:

The correct answer is letter "D": The corporate tax rate increases.

Explanation:

In case the government decides to increase the corporate tax rates, companies will have to invest more in their production process so the output will be higher as long as the revenues so that extra profit could cushion the increase in the levies. However, if companies do not have enough reserves to invest, they are likely to request loans that will increment the firm's debt in the long run.