Which of the Following Is Consistent with the Trade-Off Theory

question 48

Multiple Choice

Which of the following is consistent with the trade-off 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:

Spending Variance

is the difference between the budgeted amount of expenses and the actual amount spent.

Flexible Budget

A budget that adjusts or flexes with changes in volume or activity, allowing for better performance evaluation.

Indirect Materials

Materials used in the production process but not directly traceable to a finished product, such as lubricants for machinery.

Spending Variance

The difference between the budgeted or planned amount of expense and the actual amount spent.