The static theory of capital structure:
A) Assumes that the ﬁrm's operations and assets are ﬁxed.
B) Assumes that the ﬁrm's operations are ﬁxed but that its assets are increasing.
C) Supports increasing the leverage employed by a ﬁrm when the probability of ﬁnancial distress becomes signiﬁcant.
D) Equates the beneﬁts of equity ﬁnancing to the costs associated with the probability of ﬁnancial distress.
E) States that a ﬁrm should operate at the point where the cost of capital is maximized.

Question

Quizplus · Accepted Answer

The static theory of capital structure assumes that a firm's operations and assets are fixed, focusing on balancing the tax benefits of debt with the costs of financial distress.

The Static Theory of Capital Structure