Which of the following statements is likely to encourage a firm to increase its debt ratio?
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A. B. C. D. E.D
None of these would promote an increase in the debt ratio of a firm. Less stable sales would lead a firm to lower its debt ratio. A lower corporate tax rate reduces the tax advantage of the deductibility of interest expense. This reduction in the tax shield provided by debt would encourage less use of debt. If management believes the firm's stock is overvalued, then it would want to issue equity, rather than debt.