CFA Level I · CFA Level I Exam · Capital Structure
Compared with a similar company in the same industry, a firm that is a market leader with a large base of tangible, easily valued assets is most likely to be able to:
The firm can most likely use more debt at a lower cost. Tangible, easily valued assets work as collateral and keep their value if distress occurs, which reduces expected financial distress costs and lenders' risk, supporting a higher target debt proportion.
- Ause more debt at a lower cost because of lower expected distress costsCorrect
- Buse less debt because tangible assets increase agency costs
- Cuse more debt only if it first lowers its operating leverage to zero
Explanation
Tangible assets that are easily valued serve as collateral and retain value in distress, lowering expected costs of financial distress and the cost of debt. This supports higher leverage. The other options reverse the relationship or add a condition that is unnecessary.
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