Which of the following is the best deﬁnition of static theory of capital structure?
A) The costs that are directly associated with bankruptcy, such as legal and administrative expenses.
B) The cost of capital of a ﬁrm that has no debt.
C) Theory that a ﬁrm borrows up to the point where the tax beneﬁt from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of ﬁnancial
Distress.
D) The equity risk that comes from the nature of the ﬁrm's operating activities.
E) The tax saving attained by a ﬁrm from interest expense.

Question

Quizplus · Accepted Answer

The static theory of capital structure is a theory that suggests that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress. Option A refers to bankruptcy costs, option B refers to the cost of capital without debt, option D refers to equity risk, and option E refers to tax savings from interest expense, which are not the best definitions of static theory of capital structure.

Which of the Following Is the Best Deﬁnition of Static