The Tradeoff Theory Suggests

question 30

Multiple Choice

The tradeoff theory suggests:

• A)the firm should choose a debt level where the tax savings from increasing leverage are just offset by the increased probability of incurring the costs of financial distress.
• B)with higher costs of financial distress,it is optimal for the firm to choose higher leverage.
• C)differences in the magnitude of financial distress costs and the volatility of cash flows cannot explain the differences in the use of leverage across industries.
• D)there is no rational explanation for why firms choose debt levels that are too low to fully exploit the debt tax shield.
• E)the firm should choose a debt level where the cost of debt is equal to the cost of equity.

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Definitions:

Financial Statement Analysis Report

A document that uses detailed reviews and analysis of financial statements to assess a company's performance and prospects.