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:

Variability in Performance

The degree to which the outcomes or results of a process, such as service delivery, can differ over time.

Symbolic

Serving as a representation or symbol of ideas, values, or concepts without having a direct practical application.

Experiential Attribute

A characteristic of a product or service that is perceived through the senses during use, contributing to the overall customer experience.

Customer Delight

The result of exceeding customer expectations to a significant degree, creating a highly positive emotional response.