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Question(s) / Instruction(s):

Which of the following statements is CORRECT, holding other things constant?

A             Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.

B             An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.

C             If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.

D             An increase in the company’s degree of operating leverage is likely to encourage a company to use more debt in its capital structure.

E              An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.

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