Which One of the Following Is Correct Based on the Static

question 1

Multiple Choice

Which one of the following is correct based on the static theory of capital structure?

• A)A debt-equity ratio of 1 is considered to be the optimal capital structure.
• B)The more debt a firm assumes,the greater the incentive to acquire even more debt until such time as the firm is financed with 100 per cent debt.
• C)At the optimal level of debt a firm also optimises its tax shield on debt.
• D)A firm receives the greatest benefit from debt financing when its tax rate is relatively low.
• E)The costs of financial distress decrease the value of a firm.

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Definitions:

Expected Price Level

The anticipated average level of prices for all goods and services in an economy for a future period, influenced by current and forecasted economic conditions.

Real Wage

The buying capacity of salaries once corrected for inflation, showing the amount of products and services that can be purchased.

Nominal Wage

The wage or salary paid to labor in current dollars, unadjusted for inflation, representing the face value of earned income.

Price Level

Refers to the average of all current prices for goods and services in an economy.