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GarryVolchara [31]
3 years ago
6

In the trade-off theory, debt levels chosen to balance interest tax shield against the costs of financial distress imply:_______

_
a. an interior optimum (firm value maximizing) debt ratio
b. that investors are irrational, since they require lower returns the hgher the risk
c. that a firm would use little to no debt
d. that a firm would borrow as much as possible
Business
1 answer:
pychu [463]3 years ago
3 0

Answer:

a) an interior optimum (firm value maximizing) debt ratio

Explanation:

Trade off Theory is about capital structure of an economic unit. It mentions about the benefit of debt - ie tax saving, as interest on debt is tax deductible; & cost of debt - bankruptcy & insolvency risk, due to fix interest cost.

The theory depicts the debt level, which is best to - balance interest tax shield against the costs of financial distress imply, which implies that it seeks a balance between benefit & cost of debt.

So, the theory finds the best interior optimum (firm value maximising) debt equity ratio.

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