A$.$

According to the tradeoff$$ theory, the total value of a levered firm equals the value of the firm without leverage plus the present value of the tax savings from$$ debt, less the present value of financial distress costs.

B$.$

Firms have an incentive to increase leverage to exploit the tax benefits of debt. But with too much$$ debt, they are more likely to risk default and incur financial distress costs.

C$.$

Leverage has costs as well as benefits.

D$.$

The tradeoff theory weighs the costs of debt that result from shielding cash flows from taxes against the benefits from the effects of financial distress associated with leverage.