The "Trade-Off Theory" of Capital Structure Suggests That

question 36

Multiple Choice

The "trade-off theory" of capital structure suggests that:

• A)Firms add leverage whenever interest rates are low.
• B)Firms with higher risk should use less debt.
• C)Firms should use 50% debt and 50% equity.
• D)Firms should use debt to overcome high par values of stock.

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Definitions:

Contributed Capital

Equity that has been provided to a company by its shareholders through the purchase of stock.

Retained Earnings

The portion of a company's profits that is retained and not distributed to shareholders, often reinvested in the business or used to pay off debt.

Intangible Assets

Assets that cannot be seen, touched, or physically measured and are created through time and effort, such as trademarks, patents, and copyrights.

Current Liabilities

Financial obligations or debts of a business that are due to be paid within a year.