Which Theory Proposes That Companies Have an Optimal Capital Structure

question 2

Multiple Choice

Which theory proposes that companies have an optimal capital structure based on a trade-off between the benefits and costs of using debt?

• A)Trade-off theory.
• B)Reverse pecking order theory.
• C)Information asymmetry theory.
• D)Pecking order theory.

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Definitions:

Common Stock

Common stock represents ownership shares in a corporation, giving holders voting rights and a share in the company's profits through dividends.

Par Value

A nominal value assigned to share of stock in the charter of a corporation, unrelated to market value.

Legal Expense

Costs incurred in the process of legal advice, litigation, or other legal services.

Paid-In Capital

Funds raised by a company through the sale of its shares to investors, over and above the par value of these shares.