Final answer:
The correct answer is option a. An increase in the corporate tax rate would encourage a firm to increase its debt due to the tax deductibility of interest payments, which provides a tax shield benefit. This is the most direct factor among the options that would incentivize a firm to leverage more debt in its capital structure.
Step-by-step explanation:
The question asks which of the following would likely encourage a firm to increase the debt in its capital structure. Among the options given, the corporate tax rate increases is the scenario that would most likely encourage a firm to take on more debt. An increase in corporate tax rates can make debt financing more attractive because the interest payments on debt are tax-deductible, which can reduce the overall taxable income of the firm. This is often referred to as the tax shield benefit of debt.
On the other hand, an increase in the personal tax rate, a decrease in asset liquidity, and more volatile sales and earnings are factors that typically discourage additional debt due to the increased risk they pose. Changes in the bankruptcy code that make bankruptcy less costly could potentially reduce the downside of taking on additional debt, but this is not as direct a factor as the tax benefit of debt.
As a result, the correct option that would likely encourage a firm to increase its debt is: a- the corporate tax rate increases.