Asked by sourav saharan on May 08, 2024
Verified
The proposition that a firm borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called the:
A) Static Theory of Capital Structure.
B) M&M Proposition I.
C) M&M Proposition II.
D) Capital Asset Pricing Model.
E) Open Markets Theorem.
Interest Tax Shield
The reduction in income taxes that results from taking the allowable interest expense deductions from taxable income.
Financial Distress Costs
Expenses incurred by a firm facing financial difficulties, including legal, administrative, and potentially bankruptcy-related costs.
- Understand the static theory of capital structure and its implications for firm valuation.
Verified Answer
VK
Victoria KrauelMay 14, 2024
Final Answer :
A
Explanation :
The Static Theory of Capital Structure, also known as the trade-off theory, suggests that firms balance the benefits of debt, such as the tax shield, against the costs of potential financial distress. This theory posits that there is an optimal level of debt that maximizes the value of the firm by balancing these factors.
Learning Objectives
- Understand the static theory of capital structure and its implications for firm valuation.
Related questions
The Static Theory of Capital Structure States That The ...
The Financial Management Goal as It Pertains to the Capital ...
Provide a Definition of M&M Proposition I
The Static Theory of Capital Structure States That Firms Borrow ...
According to the Static Theory of Capital Structure, Value-Maximizing Financial ...