The static theory of capital structure advocates that the optimal capital structure for a firm:
A)is dependent on a constant debt-equity ratio over time.
B)remains fixed over time.
C)is independent of the firm's tax rate.
D)is independent of the firm's weighted average cost of capital.
E)equates the tax savings from an additional dollar of debt to the increased bankruptcy costs related to that additional dollar of debt.

Question

Quizplus · Accepted Answer

The static theory of capital structure suggests that there is an optimal capital structure where the benefits of debt (tax savings) are balanced against the costs (increased bankruptcy risk). This point is where the marginal tax shield from an additional dollar of debt equals the marginal bankruptcy cost from that additional dollar of debt.

The Static Theory of Capital Structure Advocates That the Optimal