Lets discuss some corporate finance questions

CFA Level II Corporate Finance
#1

Under the trade off theory of the capital structure:

  1. If the company’s tax rate increase, how the optinal debt ratio would cihange???

  2. If the sales revenue tend to be more stable, how the optinal debt ratio would cihange???

  3. If the company has better grow opportunity, how the optinal debt ratio would cihange???

#2

1- I guess if tax rate increase, the tax shield would be greater, firm would tend to use a bit more debt to reduce WACC

3- Better grow opportunity -> promising future -> probably leads to greater level of risk taking -> probably more debt ( the firm will be more confident to raise debt)

2- No idea. No change?

Where did you get these from? Quite interesting

#3

For 2, would stabilizing Sales Revenue mean less growth? So therefore you would want to reduce the amount of debt.

#4

1logic has valid point here, I second that.