Question

11. ____________ states that a firm borrows up to the point where the benefit of the interest (or debt) tax shield from an extra dollar of debt is just equal to the expense of the resulting increase in bankruptcy costs.
A) The Modigliani and Miller (M&M) Proposition I without taxes and without bankruptcy costs
B) The Modigliani and Miller (M&M) Proposition II without taxes and without bankruptcy costs
C) The static theory (or trade-off theory) of capital structure
D) The pecking-order theory

Answer 1

The Static Theory of Capital Structure states that a firm borrows up to the point where the benefit of the interest (or debt) tax shield from an extra dollar of debt is just equal to the expense of the resulting increase in bankruptcy costs.

Therefore, Option C is correct.

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