The trade-off theory states that capital structure decisions involve a tradeoff between the costs and benefits of debt financing.

Question

Quizplus · Accepted Answer

The trade-off theory is based on the idea that companies must balance the advantages and disadvantages of taking on debt. The benefits of taking on debt can include tax benefits and increased leverage, while the costs can include the risk of financial distress and the cost of servicing the debt. The trade-off theory suggests that firms should aim to find an optimal level of debt that maximizes their value while minimizing their costs.

The Trade-Off Theory States That Capital Structure Decisions Involve a Tradeoff