Sheila makes two comments regarding the static tradeoff theory.

Comment 1:     “As the proportion of debt in a firm rises, the value of the levered firm initially rises and then falls.”

Comment 2:     “As the proportion of debt in a firm rises, its after-tax cost of debt initially falls and then rises.”

 

Are Sheila’s comments about the static tradeoff theory correct? WHY OR WHY NOT ? EXPLAIN

Answer rating: 100% (QA)

Yes both of Sheilas comments are generally consistent with the Static Tradeoff Theory which aims to explain how firms optimally choose their capital s... View the full answer