The Trade-Off Theory Suggests

question 2

Multiple Choice

The trade-off 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)there is no rational explanation for why firms choose debt levels that are too low to fully exploit the debt tax shield.
• D)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.

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Definitions:

Market Elements

The various components that influence and define a market, such as supply and demand, competition, and customer needs.

Chain of Customers

The sequential stages through which a product or service passes, from production to final purchase by the end consumer.

Entrepreneurship

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