Which One of the Following Is Correct Based on the Static

question 57

Multiple Choice

Which one of the following is correct based on the static theory of capital structure?

• A)A firm receives the greatest benefit from debt financing when its tax rate is relatively low.
• B)A debt-equity ratio of 1 is considered to be the optimal capital structure.
• C)The costs of financial distress decrease the value of a firm.
• D)The more debt a firm assumes, the greater the incentive to acquire even more debt until such time as the firm is financed with 100 percent debt.
• E)At the optimal level of debt a firm also optimizes its tax shield on debt.

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Definitions:

Money Market Equilibrium

The state where the supply of and the demand for money balances, resulting in economic stability at a given interest rate.

Interest Rate

The amount charged by lenders to borrowers for the use of assets, expressed as a percentage of the principal, or the amount earned by an investment.

Quantity of Money

The total amount of money in circulation or in existence in a country or the economy at a specific time.

Recessionary Gap

The difference between the real GDP and the potential GDP of an economy, indicating a situation where resources are underutilized.