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:

Organizational Flexibility

The ability of a company or organization to adapt quickly to changes in its environment, including market trends, technologies, and internal dynamics.

Limited Liability

A legal structure where an individual's financial risk is limited to a fixed amount, typically the value of their investment in a company.

Perpetual Existence

A term used to describe a company's ability to continue operating indefinitely unless it decides to terminate.

Sole Proprietorship

A business owned and operated by a single individual, with no distinction between the business and owner legally or financially.