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.

---

Definitions:

Corporate Marginal Tax Rate

The tax rate that a corporation pays on its last dollar of taxable income, which can impact corporate investment decisions and strategies.

Marginal Tax Rate

The percentage of tax levied on the last dollar of an income earner's taxable income, reflecting the tax applied to each income level for which the taxpayer is eligible.

After-Tax Cost

The net cost of an investment or financing after taking into account the effects of taxation.

Dividend Growth

Refers to the year-over-year increase in dividends paid out by a company, indicating its ability to generate increasing profits over time.