The static theory of capital structure states that the:
A) Debt-equity ratio of a firm is permanently fixed.
B) Optimal firm value is reached when the tax benefit from another dollar of debt is exactly offset by the financial distress costs of that debt.
C) Value of a firm rises in a linear fashion in response to the pre-tax cost of debt.
D) Value of a firm rises every time the debt-equity ratio is increased.
E) Financial distress costs of a firm are constant.

Question

Quizplus · Accepted Answer

The static theory of capital structure suggests that there is an optimal debt-equity ratio where the tax benefits from debt are exactly offset by the costs of financial distress, maximizing the firm's value.

The Static Theory of Capital Structure States That The