Which of the Following Is Consistent with the Tradeoff Theory

question 24

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) There are no costs associated with bankruptcy.
• D) There is an optimal level of debt financing.

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Definitions:

Capital Balance

A financial balance within a company's or individual's equity account, representing the amount of funds contributed by owners or partners.

Bonus Method

An accounting method for recording partner investments and distributions where the new partner's capital is adjusted to reflect any bonus given to or received from the existing partners, affecting the capital accounts but not the reported income of the partnership.