The trade-off theory of capital structure says that managers will increase debt to the point at which:
A) the costs of adding another dollar of debt is equal to the benefits.
B) the costs of adding another dollar of debt is smaller than the benefits.
C) the costs of adding another dollar of debt is greater than the benefits.
D) none of the above.

Question

Quizplus · Accepted Answer

The trade-off theory of capital structure says that managers will increase debt to the point at which the costs and benefits of adding another dollar of debt are exactly equal because this is the capital structure that maximises company value.

The Trade-Off Theory of Capital Structure Says That Managers Will