The Static Theory of Capital Structure

question 254

Multiple Choice

The static theory of capital structure:

• A) Assumes that the firm's operations and assets are fixed.
• B) Assumes that the firm's operations are fixed but that its assets are increasing.
• C) Supports increasing the leverage employed by a firm when the probability of financial distress becomes significant.
• D) Equates the benefits of equity financing to the costs associated with the probability of financial distress.
• E) States that a firm should operate at the point where the cost of capital is maximized.

---

Definitions:

U.S. Judicial Conference

The U.S. Judicial Conference is the policymaking body for the federal court system, tasked with ensuring the efficient administration of justice within the federal judiciary.

Inflation

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.

Automatic Stay

A legal provision that halts all lawsuits, foreclosures, and collection activities against a debtor the moment a bankruptcy petition is filed.

Creditor

An individual or institution that lends money or extends credit to another party, known as the debtor.