Question

Under the trade off theory of capital structure, the optimal debt ratio is achieved when Select one: Tax benefits from using debt match the expected distressed costs Firm value is at minimum value Tax benefits from using debt exceed the expected distressed costs Weighted average cost of capital is highest

Answer 1

When we are calculating the optimal debt ratio through the trade off theory of the capital structure, then, we will be trading off the tax benefit which are obtained by Debt capital with the distressed cost which is also provided by Debt capital.

Hence, We will be trying to trade off between cost of financial distress and benefit associated with the interest tax deductions.

Correct answer will be option (A ) Tax benefit from using debt match the expected distress costs.