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

Question

Quizplus · Accepted Answer

The tradeoff theory of optimal capital structure assesses the advantages of using debt to finance a portion of a company's assets versus the potential costs of financial distress associated with high levels of debt. Interest payments and dividend reinvestment are factors that are generally considered as part of the cost of debt, while input factors do not directly impact the tradeoff between debt and equity financing. Therefore, the correct answer is A.

The Tradeoff Theory of Optimal Capital Structure Weighs the Benefits