The trade-off theory tells us that the capital structure decision involves a tradeoff between the costs of debt financing and the benefits of debt financing.

Question

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The trade-off theory suggests that companies must balance the advantages of debt financing, such as its tax deductibility and potential to enhance returns to shareholders, with the disadvantages, such as the cost of interest payments and the risk of financial distress.

The Trade-Off Theory Tells Us That the Capital Structure Decision