According to the Trade-Off Theory,optimal Capital Structure Occurs When

question 73

Multiple Choice

According to the trade-off theory,optimal capital structure occurs when:

• A) additional borrowing results in lower financial distress costs.
• B) additional borrowing is offset by the interest tax shield.
• C) the tax savings from additional leverage are offset by the increased costs of distress.
• D) the present value of the tax shield exceeds the value of the all-equity-financed firm.

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Definitions:

Estimated Liability

Estimated Liability refers to a potential financial obligation that can be reasonably estimated but its exact value or timing is uncertain.

Warranty Expense

Costs incurred by a company to repair, replace, or compensate for faulty products during the warranty period.

Net Sales

The revenue from goods or services sold after deducting returns, allowances for damaged or missing goods, and any discounts allowed.

Expense Warranty Accrual Method

An accounting method that records the estimated costs of warranties as an expense at the time of sale to better match revenues with expenses.