According to the trade-off theory,if the PV of the tax shield generated by debt is equal to the PV of the financial distress costs,then the:

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The trade-off theory suggests that a firm should use debt to take advantage of the tax shield but not to the extent that the PV of financial distress costs exceeds the PV of the tax shield. If these cash flows are equal, it indicates that the firm has reached its optimal debt level. Choosing A or D is incorrect because the tax shield and financial distress costs are the factors that determine the optimal debt level, and a low risk of financial distress does not mean that the tax shield has been calculated incorrectly. B is also incorrect since the theory does not identify the optimal debt level as either too heavily levered or under-levered, but rather at the point where the trade-off between tax advantages and financial distress costs is maximized.

According to the Trade-Off Theory,if the PV of the Tax