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Trade-off theory

The trade-off theory provides several insights to financial managers concerning optimal capital structure. Which of the following statements is false?
a. Other things equal, firms with large amounts of marketable fixed assets should use more debt financing than firms whose value stems mostly from intangible assets.
b. Other things equal, firms with high corporate tax rates should use less debt financing than firms with low tax rates.
c. Other things equal, firms with high business risk should use less debt financing than firms with low business risk

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The trade-off theory provides several insights to financial managers concerning optimal capital structure. Which of the following statements is false?
a. Other things equal, firms with large amounts of marketable fixed assets should use more debt financing than firms whose value stems mostly from intangible assets.
b. Other things equal, firms with high corporate tax rates should use less debt financing than firms with low tax rates.
c. Other things equal, firms with high business risk should use less debt financing than firms with low business risk

ANSWER:

The statement which is false is:

b. Other things equal, firms with high corporate tax rates should use less debt financing than firms with low tax rates.

The trade off theory states that the optimal capital structure ...

Solution Summary

Answers a multiple choice question on trade-off theory.

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