The static theory of capital structure advocates that the optimal capital structure for a company:
A) is highly dependent upon a constant debt-equity ratio over time.
B) remains fixed over time.
C) is independent of the company's tax rate.
D) is independent of the company's debt-equity ratio.
E) equates marginal tax savings from additional debt to the marginal increased bankruptcy costs of that debt.

Question

Quizplus · Accepted Answer

The static theory of capital structure believes that the optimal capital structure for a company can be achieved by equating the marginal tax savings from additional debt to the marginal increased bankruptcy costs of that debt. This means that a company should find the right balance between debt and equity financing, taking into consideration the tax benefits of debt, but also being mindful of the potential risk of bankruptcy or financial distress. The theory does not advocate for a constant debt-equity ratio over time, a fixed capital structure, or a disregard of the company's tax rate or debt-equity ratio.

The Static Theory of Capital Structure Advocates That the Optimal