The Static Theory of Capital Structure Supports the Theory That

question 98

Multiple Choice

The static theory of capital structure supports the theory that value-maximizing managers will:

• A) Look to the asset side of the balance sheet to increase firm value since the mix of debt and equity selected is unlikely to affect firm value.
• B) Not concern themselves with the capital structure of the firm as it is an irrelevant issue.
• C) Select the capital structure for which the cost associated with the probability of financial distress equals the benefit of the interest tax shield.
• D) Select an all equity capital structure to ensure the value of the firm is maximized.
• E) Select the capital structure which maximizes the interest tax shield.

---

Definitions:

Bond Interest Expense

The amount of interest a company must pay periodically to holders of its bonds, as per the interest rate specified in the bond agreement.

Bond Liability

An obligation or debt issued by a company, promising to repay the principal amount along with interest to bondholders at a specified future date.