The Tradeoff Theory Suggests That ________

question 30

Multiple Choice

The Tradeoff Theory suggests that ________.

• A) a 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 a firm to choose higher leverage
• C) 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
• D) there is no rational explanation for why firms choose debt levels that are too low to fully exploit the debt tax shield

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Definitions:

Potato Crop

A cultivated plant of the species Solanum tuberosum, grown for its edible tubers.

Slime Molds

Group of eukaryotic organisms that are not fungi, plants, or animals but share common characteristics with these groups during parts of their life cycle.

Protists

Refers to a diverse group of eukaryotic organisms, mostly unicellular, that are not animals, plants, or fungi.

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