Assume both corporate taxes and financial distress costs apply to a firm.Given this, the static theory of capital structure illustrates that:

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The static theory of capital structure suggests that a firm's value increases with debt due to tax shields but decreases due to financial distress costs, leading to an optimal capital structure where the weighted average cost of capital is minimized, thus inversely relating firm value and WACC.

Assume Both Corporate Taxes and Financial Distress Costs Apply to a Firm.Given