The Trade-Off Theory of Capital Structure Describes the Optimal Capital

question 59

Multiple Choice

The trade-off theory of capital structure describes the optimal capital structure for any firm as being the level of debt that:

• A) minimizes the financial distress costs.
• B) maximizes the present value of the interest tax shield.
• C) equates the present values of the interest tax shield and the financial distress costs.
• D)maximizes the after-tax cash flows that are internally generated.

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Definitions:

Pennate

Describes muscles with fibers that are oriented at an angle to the tendon, resembling a feather's structure, which allows for higher force production.

Tendon

Band or cord of dense connective tissue that connects a muscle to a bone or another structure.

Origin

Less movable attachment point of a muscle; usually the medial or proximal end of a muscle associated with the limbs; also called fixed end.

Class I Lever

A type of lever where the fulcrum is placed between the effort and the load, commonly exemplified by a seesaw.