The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing.

Question

Quizplus · Accepted Answer

The trade-off theory of capital structure suggests that there is an optimal debt-to-equity ratio for a company, and that the choice of this ratio involves balancing the benefits of debt (such as tax savings and financial leverage) against the costs of debt (such as bankruptcy risk and higher interest expenses). Therefore, the answer is true.

The Trade-Off Theory States That the Capital Structure Decision Involves