The Static Theory of Capital Structure Assumes a Firm

question 45

Multiple Choice

The static theory of capital structure assumes a firm:

• A)maintains a constant debt-equity ratio.
• B)has an all-equity structure.
• C)is fixed in terms of its assets and operations.
• D)pays no taxes.
• E)is operating at the point where financial distress costs are eliminated.

---

Definitions:

Investment Banks

Financial institutions that act as intermediaries in the issuance of new securities and provide various financial services, including underwriting and mergers and acquisitions.

Housing Market

The supply and demand for houses, reflected in house prices and rent, and the transaction activity in residential property.

Leverage Ratios

The ratio of loans and other investments to the firm’s capital assets.

Mortgage-backed Securities

Financial instruments created by pooling mortgages and selling the rights to the cash flows from these mortgages to investors.