The Tradeoff Theory of capital structure theory indicates that
A) the tax shield on debt positively affects firm value, indicating that there is some benefit to financial leverage as opposed to an all-equity capitalization.
B) the higher the firm's financial leverage, the higher the probability the firm will be unable to meet the financial obligations included in its debt contracts, which could ultimately lead to firm failure.
C) there is a range of capital structures, rather than a single capital structure, that is optimal.
D) all of the above.

Question

Quizplus · Accepted Answer

The Tradeoff Theory of capital structure theory considers the tax shield benefits of debt as well as the potential risk of financial distress due to high leverage. Therefore, it suggests that there is a range of capital structures that can be optimal for a firm depending on its unique circumstances.

The Tradeoff Theory of Capital Structure Theory Indicates That