The trade-off theory of capital structure recognizes the tax-shield benefit of debt financing,but also recognizes that the benefit is offset by costs associated with debt financing.

Question

Quizplus · Accepted Answer

The trade-off theory of capital structure acknowledges both the tax-shield benefit of debt financing and the associated costs. The theory suggests that there exists an optimal level of debt that maximizes the value of the firm after balancing the benefits and costs of debt financing.

The Trade-Off Theory of Capital Structure Recognizes the Tax-Shield Benefit