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

Question

Quizplus · Accepted Answer

The static theory of capital structure states that a firm's value is maximized when it operates at its optimal debt level. This optimal level is the point where the tax benefits of debt are balanced against the costs of financial distress. Therefore, statement E is the only one that correctly represents this theory. Statements A, B, C, and D are all incorrect.

Which One of the Following Statements Related to the Static