In the Traditional View, at What Level of Borrowing Does

question 1

Multiple Choice

In the Traditional view, at what level of borrowing does the Optimal Capital Structure occur?

• A) Shareholders' marginal demand for risk compensation due to borrowing is just equal to the increased returns from borrowing.
• B) The cost of common share capital is equal to the cost of borrowing.
• C) The benefits arising from tax relief due to borrowing are offset by the potential cost of bankruptcy.
• D) Shareholders are no longer indifferent to the risks associated with borrowing.
• E) There is any borrowing as shareholders always demand risk compensation equal to the increased returns from borrowing.

---

Definitions:

Perfectly Competitive

A market structure characterized by many buyers and sellers, free entry and exit, homogenous products, and perfect information, leading to firms being price takers.

Demand Curve

A visual representation indicating the link between the price of an item and the quantity of it that buyers seek.

Market-determined Price

The price of a good or service as dictated by the forces of supply and demand in a competitive market, without external interventions.

Elastic

Describes a situation in which the demand or supply for a good is sensitive to changes in price.