Firms have incentives to take on as much debt as possible give a tax rate greater than 0%. 

a) Explain why firms won't do that in practice. 

b) Include a brief example (hypothetical or real) that supports your explanation. 

c) What is the name of the theory that argues that there is an optimal capital structure, likely between 0% and 100% debt to-value ratio? 

d) Based on DeAngelo and Roll (2015), what can we say about the optimal capital structure?

Answer rating: 100% (QA)

Debt and Capital Structure Beyond the Tax Incentive Myth While a tax rate greater than 0 creates a tax shield benefit for debt financing several facto... View the full answer