Question

3. In general, observed capital structures: A. Tend to overweigh debt in relation to equity. B. Are easily explained in terms of earnings volatility. C. Are easily explained by analyzing the types of assets owned by the various firms. D. Tend to be those which maximize the use of the firm's available tax shelters. E. Vary significantly across industries. 4. Which one of the following statements is correct? A. The greater the volatility of EBIT, the more a firm should borrow. B. Firms with a large percentage of assets invested in intangibles, should borrow more than a comparable firm with a minimal investment in intangibles. C. A firm with a high annual depreciation write-off benefits more from leverage than a comparable firm with a low annual depreciation write-off. D. The static model of capital structure identifies the precise debt-equity ratio that optimizes the value of the firm. E. Firms with high tax rates have a greater incentive to borrow than firms with low tax rates.

Answer 1

3). Option E is correct. Capital structures tend to vary significantly across industries and sometimes, within industries, as well.

4). Option E is correct. Firms with high tax rates have a greater incentive to borrow than firms with low tax rates due to the tax shield.