The static theory of capital structure states that ﬁrms borrow up to the point where the tax beneﬁt of one additional dollar of debt is equal to the marginal cost of:
A) Sales.
B) Equity.
C) Financial distress.
D) Leverage.
E) Financial capital.

Question

Quizplus · Accepted Answer

The static theory of capital structure suggests that firms stop borrowing when the marginal cost of financial distress imposed by lenders is equal to the marginal tax benefit of an additional dollar of debt. Therefore, the correct answer is financial distress (option C). Options A, B, D, and E are incorrect.

The Static Theory of Capital Structure States That ﬁRms Borrow