According to the Static Trade-Off Model of Capital Structure, in a World

question 42

Multiple Choice

According to the static trade-off model of capital structure, in a world with taxes, firms have an incentive:

• A)to issue debt as this will always reduce the weighted average cost of capital.
• B)to issue debt until the benefits from the tax savings equals the costs of financial distress.
• C)to issue less debt to reduce the costs of financial distress
• D)to maximize the amount of debt.

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Definitions:

National Health Insurance

A program in which a nation’s government provides a basic package of health care to all citizens at no direct charge or at a low cost-sharing level. Financing is out of general tax revenues.

Nonprice Rationing

Refers to the distribution of goods and services based on criteria other than price, such as waiting times or ration coupons.

New Taxes

New Taxes refer to newly implemented fiscal charges by a government on individuals or corporations aimed at generating revenue for public expenditures or influencing economic behavior.

Fee-For-Service Basis

A payment model where services are unbundled and paid for separately, commonly used in healthcare sectors.