According to the Trade-Off Theory of Capital Structure

question 21

Multiple Choice

According to the trade-off theory of capital structure,

• A)optimal capital structure occurs when the present value of tax savings on account of additional borrowing just offsets the increase in the present value of costs of distress.
• B)optimal capital structure occurs when the stockholders' right to default is balanced by the bondholders' right to get interest and principal payments.
• C)optimal capital structure occurs when the benefits of limited liability is just offset by the value of the firm's lawyers' claims.
• D)None of these options are correct.

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Definitions:

Perpetual Inventory Method

An accounting method that continuously updates the inventory levels and cost of goods sold with each sale or purchase of inventory.

Credit Terms

Conditions under which credit will be extended to a customer, including payment due dates and any discounts for early payment.

Accounts Payable Ledger

A subsidiary ledger containing all individual accounts for suppliers from whom the business has purchased on credit.

Individual Amounts

Refers to the specific figures relating to financial transactions or balances that pertain to a single entity or account.