Which of the Following Statements Is Consistent with the Trade-Off

question 5

Multiple Choice

Which of the following statements is consistent with the trade-off theory?

• A)Costs of financial distress are likely to be most serious for companies with significant intangible assets.
• B)A negative relationship exists between leverage and profitability.
• C)Companies with mostly intangible assets are likely to borrow more.
• D)A positive relationship exists between leverage and non-debt tax shields.

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Definitions:

Dividend

A portion of a company's earnings distributed to its shareholders.

Cumulative Preferred Stock

A type of preferred stock where dividends accumulate if not paid, and must be paid out before dividends to common stockholders.

Common Stock

Equity security representing ownership in a corporation, with rights to vote on corporate matters and receive dividends.

Dividend

A portion of a company's earnings distributed to its shareholders, typically on a regular basis.