The Static Theory of Capital Structure

question 49

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.

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Definitions:

Illness

A state of being in poor health or experiencing an ailment, disease, or sickness.

Psychological Disorders

Mental health conditions characterized by changes in thinking, mood, or behavior associated with distress or impaired functioning.

Sick Role Behavior

Those activities undertaken by people who have been diagnosed as sick that are directed at getting well.

Illness Behavior

Those activities undertaken by people who feel ill and who wish to discover their state of health, as well as suitable remedies. Illness behavior precedes formal diagnosis.