The Controversy Over the Existence of an Optimal Capital Structure

question 19

Multiple Choice

The controversy over the existence of an optimal capital structure is debated between those ________ who believe a traditional approach exists and those ________, who do not believe one exists. In the ________ approach to capital structure, the optimal capital structure occurs where the ________ is minimized.

• A) supporters of Modigliani and Miller; traditionalists; Modigliani and Miller; degree of financial leverage
• B) traditionalists; supporters of Modigliani and Miller; traditional; cost of capital
• C) supporters of Modigliani and Miller; traditionalists; Modigliani and Miller; cost of capital
• D) traditionalists; supporters of Modigliani and Miller; traditional; degree of financial leverage

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Definitions:

Disposable Income

Post-tax funds households can use for expenditure and savings.

Induced Consumption

Consumer spending that is influenced by changes in income levels, as opposed to spending that is not influenced by such changes.

Disposable Income

The funds that are available to households for saving and spending activities after the deduction of income taxes.

Induced Consumption

The portion of consumer spending that increases with an increase in disposable income, implying that as people earn more, they tend to spend more.