What is being traded off in trade-off theory?
A)Tax savings from interest and financial distress costs
B)Cost of equity and cost of debt
C)Dividend payments and interest payments
D)EBIT and EPS

Question

Quizplus · Accepted Answer

The trade-off theory describes the decision-making process of a firm when determining the optimal capital structure. The theory suggests that there is a trade-off between the tax savings from interest payments and the financial distress costs associated with high levels of debt. Therefore, the best choice is A.

What Is Being Traded Off in Trade-Off Theory