Which one of the following factors would likely cause a firm to increase its use of debt financing as measured by the debt-to-total-capital ratio?

A. Increased economic uncertainty.

C. An increase in the price-earnings ratio.

D. An increase in the corporate income tax rate.

It would depend on a number of both internal and external factors, short-term and long- term strategies, goals and obligations and then the type and term of what was chosen. Notwithstanding these unknown factors in the question, the likelihood would be either B or D. With B the increase in leverage would avail the business to expand its credit rating through unanticipated or anticipated debt exposure if the corporate strategy both allowed for and/or instigated it. Higher debt exposure may bring added benefits depending on whether the entity is unilateral in approach or operates on a group or consortia basis. Increased corporate tax may also be the catalyst depending,again, on corporate strategy, outlook, and anticipated gains/losses. Variables may alter this and it may likely be that the tax increase falls under the position of increased leverage (principally in ‘group’-focused entities.

Which one of the following factors would likely cause a firm to increase its use of debt financing as measured by the debt-to-total-capital ratio? An increase in the corporate income tax rate. ( Modigliani–Miller theorem)

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The correct Answer is D: An increase in the corporate income tax rate

D.---------

An increase in the corporate income tax rate.

An increase in the operating leverage