madaochenggong

only one is correct. I dont think Div tax rate has anything to do with the tax shield on Debt. For the second statement, one of the "remedies" to the principal-agent problem is to load up on debt in order to give prevent managers for misusing or mismanaging the funds of the company. So I believe statement 2 is correct. If there isnt any agency issue then there shouldnt be the need to increase debt and thereby leverage.