CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

If we neglect tax effects and consider only financial distress, it appears that firms should use ______ debt.
A. 0 percent
B. 50 percent
C. 100 percent
Explanation: Adding debt to the capital structure introduces the risk of financial distress which decreases firm value. Hence the value of the firm will be maximized with no debt.

User Contributed Comments 1

User Comment
rjdelong wouldn't the increase in ROE outweigh the effect of higher risk of default? I got this right, but is MM theory here right? Without taxes, various capital structures are all the same... so how can this question be correct? I know I'm being picky, but curious of the explanation...
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