According to the Trade-Off Theory of Capital Structure

question 61

Multiple Choice

According to the trade-off theory of capital structure,

• A)optimal capital structure occurs when the present value of tax savings on account of additional borrowing just offsets the increase in the present value of costs of distress.
• B)optimal capital structure occurs when the stockholders' right to default is balanced by the bondholders' right to get interest and principal payments.
• C)optimal capital structure occurs when the benefits of limited liability is just offset by the value of the firm's lawyers' claims.
• D)None of the options are correct.

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Definitions:

Dividends Per Share

The amount of dividend a company pays out to each shareholder for each share they own, indicating the dividend payout per individual share.

Net Income

The net earnings of a company resulting from subtracting all costs and taxes from its overall revenue.

Shares Outstanding

The total number of a company's shares that are owned by shareholders, including both public and private entities, available in the market.

Current Asset

Assets that are expected to be converted into cash, sold, or consumed within one year or the normal operating cycle of the business, whichever is longer.