The theory where a company uses debt to maximize its tax advantages up to the point where these benefits are outweighed by the associated estimated costs of financial distress and bankruptcy is best described as the:
A) agency theory.
B) bankruptcy theory.
C) pecking order theory.
D) static trade-off theory.

Question

Quizplus · Accepted Answer

The static trade-off theory suggests that firms balance the benefits of debt, such as tax advantages, against the costs of potential financial distress and bankruptcy. This theory posits that there is an optimal level of debt that maximizes a firm's value by balancing these factors.

The Theory Where a Company Uses Debt to Maximize Its