The Static Theory of Capital Structure Advocates That the Optimal

question 34

Multiple Choice

The static theory of capital structure advocates that the optimal capital structure for a firm:

• A)is dependent on a constant debt-equity ratio over time.
• B)remains fixed over time.
• C)is independent of the firm's tax rate.
• D)is independent of the firm's weighted average cost of capital.
• E)equates the tax savings from an additional dollar of debt to the increased bankruptcy costs related to that additional dollar of debt.

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Definitions:

Certainty Effect

The tendency of people to overweight outcomes that are certain relative to outcomes which are only probable.

Incremental Theorist

An Incremental Theorist believes that personal qualities, such as intelligence and ability, can be developed over time through effort and perseverance.

Entity Theorist

An individual who believes that personal qualities such as intelligence or talent are fixed traits and not significantly changeable over time.

Immediate Success

The rapid achievement of a goal or attainment of positive results shortly after efforts are made.