Question 16 5 pts If the only friction that exists is corporate tax, and interest payments are tax- deductible, what does theory predict that companies should do when setting their capital structure? Issue debt when it is overvalued, repurchase debt when it is undervalued. Issue equity when it is overvalued, repurchase equity when it is undervalued Select the combination of debt and equity that maximizes firm value by balancing the tax shield associated with debt and the bankruptcy costs associated with debt It does not matter, as capital structure is irrelevant under this theory The firm should use 100% debt to maximize the value of the tax shield Use internal capital first, followed by issuing debt when internal capital is exhausted, followed by issuing external equity as a last resort