A Trade-Off Between the Benefits of Debt Finance and the Costs

Multiple Choice

A trade-off between the benefits of debt finance and the costs of financial distress may lead to a company increasing its debt/equity ratio because:

A) of the low probability of encountering severe financial difficulties.
B) its existing debt/equity ratio is high.
C) the expected increase in financial distress is expected to outweigh the tax benefits.
D) agency costs of equity increase as the level of debt increases.