Final answer:
The static theory of capital structure suggests that firms should employ debt to the point where its cost equals the cost of the next dollar of equity raised. This approach is focused on optimizing the balance between the benefits and costs of debt financing to maximize firm value. A is the correct answer.
Step-by-step explanation:
The static theory of capital structure addresses how firms make financing decisions, balancing the employment of debt and equity.
According to this theory, firms should employ debt up to the point where its cost is equal to the cost of issuing the next dollar of equity, which suggests that the correct option is: (a) The next dollar of equity raised. This balancing act is done to minimize the weighted average cost of capital and to maximize the firm's value, taking into account the benefits of the tax shield of debt and the costs associated with the potential for bankruptcy.
Issuing debt offers the advantage of maintaining control over the company, without the interference of shareholders. However, it also brings the obligation of regular interest payments, which can be burdensome if the company's income is insufficient.
On the other hand, issuing equity dilutes control over the company but doesn't obligate the company to make fixed payments during periods of low income.