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

question 86

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 incremental interest tax shield and the incremental financial distress costs.
• D) maximizes the after-tax cash flows that are internally generated.

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Definitions:

Misrepresentation

The act of falsely or misleadingly presenting facts or information.

Moral Development

The process through which individuals develop proper attitudes and behaviors towards other people in society, based on social and cultural norms, laws, and personal beliefs.

Exclusive Dealership

A business arrangement wherein a retailer or distributor is the only authorized seller of a specific brand or product in a designated area.

Moonlighting

The practice of holding an additional job or jobs, often at night, in addition to one's main job, usually to earn extra income.