Which One of the Following Is Correct Based on the Static

question 57

Multiple Choice

Which one of the following is correct based on the static theory of capital structure?

• A)A firm receives the greatest benefit from debt financing when its tax rate is relatively low.
• B)A debt-equity ratio of 1 is considered to be the optimal capital structure.
• C)The costs of financial distress decrease the value of a firm.
• D)The more debt a firm assumes, the greater the incentive to acquire even more debt until such time as the firm is financed with 100 percent debt.
• E)At the optimal level of debt a firm also optimizes its tax shield on debt.

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Definitions:

Return on Project

The gain or loss generated by an investment relative to the amount of money invested in the project.

Wealth Contribution

The value added to an individual's or entity's net worth as a result of investment gains, income, or other financial growth activities.

Stand-Alone Projects

Independent projects in business or finance that can be evaluated separately from other projects due to distinct cash flows or investment requirements.

Mutually Exclusive

Refers to options or events that cannot occur at the same time.