Asked by Adison Evans on May 08, 2024
Verified
The static theory of capital structure states that firms borrow up to the point where the tax benefit of one additional dollar of debt is equal to the marginal cost of:
A) Sales.
B) Equity.
C) Financial distress.
D) Leverage.
E) Financial capital.
Static Theory
A concept in economic theory that assumes conditions remain constant over time.
Capital Structure
The mix of debt and equity financing that a company uses to fund its operations and growth.
Financial Distress
A situation where a company is struggling to meet its financial obligations, which may lead to bankruptcy if not adequately addressed.
- Understand the conceptual models that outline the decision-making process regarding capital structure and its effects on the valuation of a company.
Verified Answer
GG
Glenda GregoryMay 10, 2024
Final Answer :
C
Explanation :
The static theory of capital structure, also known as the trade-off theory, suggests that firms balance the tax benefits of debt financing against the costs of financial distress. This theory posits that there is an optimal level of debt where the marginal tax shield benefits of borrowing one more dollar are exactly offset by the increased marginal costs of financial distress associated with that additional dollar of debt.
Learning Objectives
- Understand the conceptual models that outline the decision-making process regarding capital structure and its effects on the valuation of a company.
Related questions
Which One of the Following Statements Concerning Bankruptcy Is Correct ...
The Financial Management Goal as It Pertains to the Capital ...
The Static Theory of Capital Structure States That The ...
The Proposition That a Firm Borrows Up to the Point ...
Which Statement Best Describes Optimal Capital Structure ...