(d) The requirement is to identify the factor that does
not affect managementís judgment about the firmís capital structure.
Answer (d) is correct because the expected return on assets
is not a factor that affects managementís judgment about the
firmís capital structure. Answer (a) is incorrect because the
greater the inherent risk of a business, the lower the optimal debt
to equity ratio. Answer (b) is incorrect because a major advantage
of debt is the tax deductibility of interest payments.
Answer (c) is incorrect because a firmís target capital structure
will be affected by the risk tolerance of management. More aggressive
management may take on more debt.