The static trade-off theory, which focuses on the benefits and costs of issuing debt, predicts that an optimal target financial debt ratio exists, which maximizes the value of the firm. The Trade-off theory of capital structure basically entails offsetting the costs of debt against the benefits of debt. The Trade-off theory of capital structure discusses the various corporate finance choices that a corporation experiences. The theory is an important one while studying the Financial Economics concepts. The theory describes that the companies or firms are generally financed by both equities and debts. In summary, the trade-off theory states that capital structure is based on a trade-off between tax savings and distress costs of debt. Firms with safe, tangible assets and plenty of taxable income to shield should have high target debt ratios.