The trade-off theory of capital structure predicts that a firm has an optimal capital structure. Below is an illustration of the relationships between the value of the unlevered firm (VU), the value of the debt tax shield (7*D), the value of debt (D), and the value of the levered firm (VI). Value of Levered Firm, VL Loss of Tax Shield Due to Excess Interest Loss of PV (Financial Distress Costs). T*D VL with High Distress Costs VL with No Distress Costs VL with Low Distress Costs. Dhigh Value of Debt, D Which of the following statements about the illustration above is (are) TRUE? Select one or more alternatives: Diow

The trade-off theory of capital structure predicts that a firm has an optimal capital structure. Below is an illustration of the relationships between the value of the unlevered firm (VU), the value of the debt tax shield (D), the value of debt(D), and the value of the levered firm (VL). Which of the following statements about the illustration above is (are) TRUE? Select one or more alternatives: Which of the following statements about the illustration above is (are) TRUE? Select one or more alternatives: Company A operates in an industry that is highly sensitive to the economic cycle while Company B operates in an industry with low sensitivity to the economic cycle. All else equal, the curve depicting the value of the levered firm is likely to be further to the right for Company A than Company B. Assume that the government increases the personal tax rate on interest income. If everything else stays the same, this would increase the slope of the straight line depicting the value of the debt tax shield. Company A operates in an industry that is highly sensitive to the economic cycle while Company B operates in an industry with low sensitivity to the economic cycle. All else equal, the curve depicting the value of the levered firm is likely to be further to the left for Company A than Company B. Assume that the government increases the personal tax rate on interest income. If everything else stays the same, this would reduce the slope of the straight line depicting the value of the debt tax shield