The Trade-Off Theory of Capital Structure Predicts That

question 34

Multiple Choice

The trade-off theory of capital structure predicts that

• A)unprofitable firms should borrow more than profitable ones.
• B)safe firms should borrow more than risky ones.
• C)rapidly growing firms should borrow more than mature firms.
• D)increasing leverage increases firm value, especially at high debt ratios.

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Definitions:

Accounts Receivable Aging Report

A report that categorizes a company's accounts receivable according to the length of time an invoice has been outstanding.

Credit Policy

The guidelines a company follows to determine credit terms for customers, including payment period, interest rates, and the criteria for extending credit.

Delayed Credit

A bookkeeping entry signifying credits that will be applied to a customer's account at a future date, affecting future billing cycles rather than immediate revenues.

Delayed Charge

A transaction that records an expenditure which will be billed to a client or customer at a future date, not immediately impacting cash flow.