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A month ago
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: 2nd
Authors:
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A month ago
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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.
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A month ago
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