The Static Theory of Capital Structure States That The

question 42

Multiple Choice

The static theory of capital structure states that the:

• A) Debt-equity ratio of a firm is permanently fixed.
• B) Optimal firm value is reached when the tax benefit from another dollar of debt is exactly offset by the financial distress costs of that debt.
• C) Value of a firm rises in a linear fashion in response to the pre-tax cost of debt.
• D) Value of a firm rises every time the debt-equity ratio is increased.
• E) Financial distress costs of a firm are constant.

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Definitions:

Bankruptcy

A legal proceeding involving a business or individual that is unable to repay outstanding debts, leading to the disposition of assets to pay creditors.

Equitable Remedies

Non-monetary judicial remedies, such as injunctions or specific performance, granted when traditional legal remedies are inadequate to resolve a dispute fairly.

Adequate Remedies

Legal solutions or compensation that are considered sufficient to remedy a breach of contract or violation of rights.

Commercial Impracticability

A doctrine in contract law allowing parties to be released from their obligations due to unforeseen events that make execution of the contract excessively burdensome.