Asked by Darshpreet Singh on Jun 19, 2024
Verified
According to the static theory of capital structure, value-maximizing financial managers will borrow to the point where the firm's business risk is just equal to its financial risk.
Static Theory
A theory that analyzes economic variables without considering changes over time.
Business Risk
Business risk pertains to the potential for loss that a business faces from factors affecting its profitability or operational success, such as market competition and demand fluctuations.
Financial Risk
The possibility of losing money on an investment or business venture due to market conditions, interest rate changes, or other financial factors.
- Examine the consequences of the static theory of capital structure for financial decision-making processes.
Verified Answer
AM
Astrid MorganJun 26, 2024
Final Answer :
False
Explanation :
According to the static theory of capital structure, value-maximizing financial managers will borrow up to the point where the tax shield benefits from additional debt are exactly offset by the costs of financial distress. This optimal point does not necessarily equate the firm's business risk with its financial risk.
Learning Objectives
- Examine the consequences of the static theory of capital structure for financial decision-making processes.