The tradeoff theory of optimal capital structure weighs the benefits of debt against the costs of:
A)financial distress.
B)interest payments.
C)dividend reinvestment.
D)input factors.
E)equity.

Question

Quizplus · Accepted Answer

The tradeoff theory of optimal capital structure considers the benefits and costs of using debt to finance a company. The benefits of debt include the tax shield from interest payments and the ability to leverage returns. The costs of debt include interest payments, but more importantly, the risk of financial distress. Financial distress occurs when a company cannot meet its debt obligations and can lead to bankruptcy. Therefore, the optimal capital structure balances the benefits of debt against the costs of financial distress.

The Tradeoff Theory of Optimal Capital Structure Weighs the Benefits