Question

Which of the following would tend to increase a firm's target debt ratio,other things held constant?

A) The costs associated with filing for bankruptcy increase.
B) The corporate tax rate is increased.
C) The personal tax rate is increased.
D) The Federal Reserve tightens interest rates in an effort to fight inflation.
E) The company's stock price hits a new low.

Answer 1

D) The Federal Reserve tightens interest rates in an effort to fight inflation.

Step-by-step explanation:

When the Federal pursues a contractionary monetary policy to fight inflation, it sells securities in order to raise the interest rate.

A higher interest rate means that both investing and borrowing becomes more expensive. The firm's previous debts become more expensive because they interest rate is now higher. For this reason, other things held constant, the frim has to raise its target debt ratio.