WarrenB1

div tax rate does affect debt vs. equity choice. but the wrong part of that answer is that it relates to Static Trade off. If you get lower tax rate on dividends - as against interest expense - company would prefer dividends.

It is however not related to static trade off theory as stated.

when agency cost decreases - more leverage would be used. [Managers have less incentive to manipulate, more controlled - more cash flows would flow towards debt service repayments].

so both statements are incorrect.

CP