Question $31$

The real worlat etonomy is complex and that complexity affects firms' capital structure choices Some examples of that complexily include the fact that there are corporate taxes and that interest payments are tax deductible. Additionally there are costs of financial distress when firms are having difficulty paying their bills and there is asymmetric information between invertors and comporate insiders, etc in this real.world environment, which of the following are true?

Firm value and wacc are indeendent of the firms captal structure.

Firm value increases and WACC increases initialy as more debt is added to the firms capital structure, however, there comes a point where adding additional debt generates potential costs of financial distress that outweigh the benefits of further reducing taxes. Atter this point, firm value and WACC start to decrease as more debt is added.

Each firm has an optimal capital structure where firm value is minimized.

Each firm has an optimal capital structure where WaCC is maximized.

Firm value increases and WACC decreases initially as more debt is added to the firm's capital structure, however, there comes a point where

$($E$)$ adding additional debt generates potential costs of financial distress that outweigh the benefits of further reducing taxes. After this point, firm value starts to decrease and WACC starts to increase as more debt is added.

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