Which of the Following Is Consistent with the Tradeoff Theory

question 87

Multiple Choice

Which of the following is consistent with the Tradeoff theory of capital structure?

• A)The cost of capital continuously decreases as the firm's debt ratio increases.
• B)The cost of capital remains constant as the firm's debt ratio increases.
• C)The cost of capital continuously increases as the firm's debt ratio increases.
• D)There is an optimal level of debt financing.
• E)Capital structure does not affect a firm's cost of capital.

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Definitions:

Cost-Benefit Analysis

A comparison of the marginal costs of a project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent.

Future Use

The intention or plan to deploy resources, products, or services at a later date, often considering the long-term benefits or applications.

Conservation

The act of preserving, protecting, or restoring the natural environment, resources, and biodiversity for future generations.

User Cost

The opportunity cost of extracting and selling a non-renewable natural resource today rather than waiting to extract and sell the resource in the future; the present value of the decline in future revenue that will occur because a nonrenewable natural resource is extracted and sold today rather than being extracted and sold in the future.