According to the trade-off theory of capital structure,the __________ benefit of increasing debt is traded-off against the __________ cost of increasing debt to determine the firm's optimal capital structure.
A) bankruptcy; tax
B) operating; tax
C) tax; operating
D) tax; bankruptcy
E) operating; bankruptcy

Question

Quizplus · Accepted Answer

The trade-off theory of capital structure suggests that the tax benefits of debt (interest is tax-deductible) are balanced against the costs of potential bankruptcy (financial distress costs) to determine the optimal level of debt for a firm.

According to the Trade-Off Theory of Capital Structure,the __________ Benefit