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 the trade-off between the tax benefits of debt and the costs of financial distress.

The Static Theory of Capital Structure