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    Question

    According to the Trade-off Theory, firms

    balance:
    A Cost of equity vs cost of debt only. Correct Answer Incorrect Answer
    B Tax shield benefits of debt vs costs of financial distress. Correct Answer Incorrect Answer
    C Dividend payments vs retained earnings. Correct Answer Incorrect Answer
    D Agency costs vs signalling benefits. Correct Answer Incorrect Answer
    E Market timing vs pecking order. Correct Answer Incorrect Answer

    Solution

    Trade-off theory states firms choose an optimal capital structure by balancing tax shield benefits of debt against bankruptcy/financial distress costs.

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