The static theory of capital structure states that the:

A) Debt-equity ratio of a firm is permanently fixed.
B) Optimal firm value is reached when the tax benefit from another dollar of debt is exactly offset by the financial distress costs of that debt.
C) Value of a firm rises in a linear fashion in response to the pre-tax cost of debt.
D) Value of a firm rises every time the debt-equity ratio is increased.
E) Financial distress costs of a firm are constant.

Static Theory of Capital Structure

A theory proposing that there is an optimal capital structure for a company, balancing the benefits and costs of debt versus equity financing to maximize value.

Financial Distress Costs

Expenses and losses incurred by a firm due to financial distress, including bankruptcy costs, agency costs, and the cost of lost opportunities.

Tax Benefit

A reduction in tax liability offered by the government for specific expenses, investments, or other financial decisions, leading to a decrease in the total taxes paid.