Which one of the following statements related to the static theory of capital structure is correct?
A)A firm begins to lose value as soon as the first dollar of debt is incurred.
B)The actual value of a firm continually rises in direct proportion to the increased use of debt.
C)The linear function of a firm's value has a constant positive slope.
D)A firm's value is maximized when a firm operates at its optimal debt level.
E)The value of a firm will automatically decrease whenever the debt-equity ratio is decreased.

Question

Quizplus · Accepted Answer

The static theory of capital structure suggests that there is an optimal level of debt that maximizes a firm's value, balancing the tax shield benefits of debt with the costs of potential financial distress.

Which One of the Following Statements Related to the Static