Question

In analyzing the value of the firm as a function of capital structure, the present value of the tax shield benefit is offset by the present value of the expected ____, resulting in an interior optimal capital structure.
a. financial distress costsb. agency costsc. holding costsd. financial distress costs and agency costs

Answer 1

Answer:

The correct answer to the following question will be Option D (Financial distress and agency costs).

Explanation:

• A cost of an agency is a form of company's internal expense that comes from an employee working on behalf of action of the principle. Agency costs usually occur from core redundancies, confusion, and delays, such as shareholder and management conflicts of interest.
• Distress expense applies to the expenses that a financially distressed company faces beyond the business cost, such as increased capital expenses. Troubled companies tend to have a tougher time fulfilling their financial responsibilities, which turns into a higher chance of default.
• When evaluating the company's value as a feature of market structure, the present value of the tax shield gain is balanced by the current value of the anticipated financial distress and agency expenses, which results in an ideal internal market structure.

Therefore, Option C is the right answer.