According to the trade-off theory,capital structure is a trade-off between:
A) tangible and intangible asset risk.
B) high and low target debt ratios.
C) tax savings and financial distress costs.
D) tax shields and equity financing.

Question

Quizplus · Accepted Answer

The trade-off theory of capital structure suggests that the optimal capital structure is a trade-off between the tax benefits of debt financing and the costs of financial distress associated with taking on too much debt. Therefore, the best choice is C, where tax savings and financial distress costs are the trade-off being considered. Choices A and B are not accurate representations of the trade-off theory, and choice D only focuses on one aspect of the trade-off.

According to the Trade-Off Theory,capital Structure Is a Trade-Off Between