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:

Internally

Pertaining to or situated within the interior or inside of something, often referring to operations or processes within an organization.

Whistle-Blowers

Individuals who expose wrongdoing, illegal activities, or unethical practices within an organization to the public or authorities.

Company Retaliation

Actions taken by an employer to punish or negatively impact an employee as a response to the employee's complaint or whistleblowing.