The Tradeoff Theory of Capital Structure Theory Indicates That

question 4

Multiple Choice

The Tradeoff Theory of capital structure theory indicates that

• A) the tax shield on debt positively affects firm value, indicating that there is some benefit to financial leverage as opposed to an all-equity capitalization.
• B) the higher the firm's financial leverage, the higher the probability the firm will be unable to meet the financial obligations included in its debt contracts, which could ultimately lead to firm failure.
• C) there is a range of capital structures, rather than a single capital structure, that is optimal.
• D) all of the above.

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Definitions:

Large CDs

Certificates of Deposit (CDs) that are categorized by their large denomination, typically used by institutional investors.

Federal Deposit Insurance

Federal deposit insurance is a protection scheme that guarantees bank deposits, protecting depositors against bank failures by covering the loss of deposits up to a specified limit.

Main Purpose

The primary aim or objective intended to be achieved by a plan, action, or project.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision; it represents the benefits that could have been received but were given up to take another course of action.