Because many relevant factors such as bankruptcy costs, tax asymmetries, and agency costs cannot easily be identified or quantified, it's practically impossible to determine the precise debt/equity ratio that maximizes the value of the firm.

Question

Cael Anthony

Business

19 August, 10:05

Because many relevant factors such as bankruptcy costs, tax asymmetries, and agency costs cannot easily be identified or quantified, it's practically impossible to determine the precise debt/equity ratio that maximizes the value of the firm.

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Hoffman · Answer 1

True

Explanation:

You cannot exactly determine many factors like bankruptcy costs, etc., but you can relativise certain values. For example, you can compare the current costs of taking debt vs. historic costs adjusted to market rates. If two years ago your company was able to take loans and paid market rate + 1% total interest, and now new loans cost market rate + 3.5%, it means that your debt to ratio is probably too high, at least for the market.