Assignment 13-Capital Structure and Leverage Due Today at 11:59 PM EST s. More o
ID: 2804379 • Letter: A
Question
Assignment 13-Capital Structure and Leverage Due Today at 11:59 PM EST s. More on capital structure theory AaAa The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other factors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capital structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? O Firms that have relatively lower business risk compared to other firms in their industry O Firms that have relatively higher business risk compared to other firms in their industry Based on your understanding of the capital structure theories, identify the best option for the missing part of the statement. Option 1 Option 2 According to signalling theory, a firm with a very positive outlook might tend to use debt financing 7777 the normal target capital structure. Beyond Equal to According to the windows of opportunity theory, managers 222? in efficient marketsExplanation / Answer
Based on trade-off theory, firms that have relatively lower business risk compared to other firms in their industry are likely to use more leverage.
According to signalling theory, a firm with a very positive outlook might tend to use debt financing beyond the normal target capital structure.
According to windows of opportunity theory, managers believe in efficient markets.
According to pecking order hypothesis, a profitable firm is likely to use more debt than a less profitable firm.
Firms prefer internal funds, but if forced to raise external capital, they prefer debt capital rather than equity issuance. This statement describes the theory of pecking order hypothesis.