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The Tradeoff Theory suggests:

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The Tradeoff Theory suggests:

The Tradeoff Theory suggests:

▸ there is no rational explanation for why firms choose debt levels that are too low to fully exploit the debt tax shield.

▸ differences in the magnitude of financial distress costs and the volatility of cash flows cannot explain the differences in the use of leverage across industries.

▸ with higher costs of financial distress, it is optimal for the firm to choose higher leverage.

▸ the firm should choose a debt level where the tax savings from increasing leverage are just offset by the increased probability of incurring the costs of financial distress.

Textbook

Fundamentals of Corporate Finance

Edition: 2^nd

Authors: Berk, DeMarzo, Harford

Read 249 times

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