According to the static theory of capital structure, a firm borrows up to which

Question

According to the static theory of capital structure, a firm borrows up to which one of the following points?

point where the firm is financed totally with debt

point where an additional dollar of debt would have a benefit exactly equal to its cost

point where WACC equals the debt-equity ratio

point where the debt-equity ratio equals 1.0

point where the firm is financed totally with debt

point where an additional dollar of debt would have a benefit exactly equal to its cost

point where WACC equals the debt-equity ratio

point where the debt-equity ratio equals 1.0

Explanation / Answer

The static theory of capital structure refers to the proportion of Debt and Equity finance in capital structure of a firm. This is done by evaluating cost and benefit of using debt and equity for finaning the capital of a firm. It explains the tax shield advantange of debt financing and upto what level the firm should use debt as financial so that it can maximise its benefit over cost and propecting its ownership right.

Hence, according to the static theory of capital struture, a firm borrows up to a point where an additional dollor of debt would have a benefit exactly equal to its. cost.

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