Interest coverage ratio Consider a firm with a constant interest coverage ratio (k): Interest paid in Year t k FCF If taxes are the only imperfection, which is the optimal k? a) 0.5 b) 0 c) 1 d) as high as possible

Interest coverage ratio Consider a firm with a constant interest coverage ratio (k): Interest paid in Year t k FCF If taxes are the only imperfection, which is the optimal k? a) 0.5 b) 0 c) 1 d) as high as possible

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 18P

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Question

Why is the optimal interest coverage ratio equal to 1 if taxes are the only imperfection?

Interest coverage ratio
Consider a firm with a constant interest coverage ratio (k):
Interest paid in Year t k FCF
If taxes are the only imperfection, which is the optimal k?
a) 0.5 b) 0 c) 1 d) as high as possible

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