Which One of the Following Statements Related to the Static

question 9

Multiple Choice

Which one of the following statements related to the static theory of capital structure is correct?

• A)The linear function of a firm's value has a constant positive slope.
• B)The value of a firm will automatically decrease whenever the debt-equity ratio is decreased.
• C)The actual value of a firm continually rises in direct proportion to the increased use of debt.
• D)A firm begins to lose value as soon as the first dollar of debt is incurred.
• E)A firm's value is maximised when a firm operates at its optimal debt level.

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Definitions:

Operating Profit

Income from business operations after operating expenses are subtracted from gross profits, but before taxes and interest expenses.

Operating Expense

ongoing costs for running a product, business, or system.

Operating Profit

The earnings of a business from its core operations, excluding the effects of interest and taxes.

Mark-up

The surplus added onto the base cost of products intended to cover operational costs and generate profit.