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    Question

    Which of the following best describes trade-off in

    capital structure decisions?
    A Choosing between equity and debt to maximise shareholder value while balancing tax benefits of debt and bankruptcy costs Correct Answer Incorrect Answer
    B Always choose 100% debt to maximize returns Correct Answer Incorrect Answer
    C Never use debt to avoid any cost Correct Answer Incorrect Answer
    D Only equity financing is suitable for all firms Correct Answer Incorrect Answer

    Solution

    The trade-off theory of capital structure posits that firms choose their debt levels by balancing the tax advantages of debt against the costs of financial distress.

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