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 with a higher proportion of fixed-versus-variable costs O Firms with a higher proportion of variable-versus-fixed costs Based on your understanding of the capital structure theories, identify the best option for the missing part of the statement. According to signalling theory, if managers expect the firm's stock price to decrease, they are ???? to raise capital through equity financing. O Discouraged O Encouraged According to the windows of opportunity theory, managers ???? in efficient markets. O Don't believe O Believe Under the pecking-order hypothesis, a firm will raise capital by using its net income, selling its marketable securities, issuing debt, and then issuing stock as the last resort. This statement is ????. O True O False Several dominant theories try to explain why financial managers make the capital structure decisions that they do. The following statement describes one such theory. Consider this case: The firm's debt-equity decision finds the optimal balance between the interest tax shield benefits of debt financing and the costs of financial distress associated with issuing debt. Identify which of the two theories is described by the statement. O Pecking-order hypothesis O Trade-off theory
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 with a higher proportion of fixed-versus-variable costs O Firms with a higher proportion of variable-versus-fixed costs Based on your understanding of the capital structure theories, identify the best option for the missing part of the statement. According to signalling theory, if managers expect the firm's stock price to decrease, they are ???? to raise capital through equity financing. O Discouraged O Encouraged According to the windows of opportunity theory, managers ???? in efficient markets. O Don't believe O Believe Under the pecking-order hypothesis, a firm will raise capital by using its net income, selling its marketable securities, issuing debt, and then issuing stock as the last resort. This statement is ????. O True O False Several dominant theories try to explain why financial managers make the capital structure decisions that they do. The following statement describes one such theory. Consider this case: The firm's debt-equity decision finds the optimal balance between the interest tax shield benefits of debt financing and the costs of financial distress associated with issuing debt. Identify which of the two theories is described by the statement. O Pecking-order hypothesis O Trade-off theory
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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?
Firms with a higher proportion of fixed-versus-variable costs
Firms with a higher proportion of variable-versus-fixed costs
Based on your understanding of the capital structure theories, identify the best option for the missing part of the statement.
According to signalling theory, if managers expect the firm's stock price to decrease, they are ???? to raise capital through equity financing.
Discouraged
Encouraged
According to the windows of opportunity theory, managers ???? in efficient markets.
O Don't believe
Believe
Under the pecking-order hypothesis, a firm will raise capital by using its net income, selling its marketable securities, issuing debt, and then issuing
stock as the last resort. This statement is ????.
O True
O False
Several dominant theories try to explain why financial managers make the capital structure decisions that they do. The following statement describes
one such theory.
Consider this case:
The firm's debt-equity decision finds the optimal balance between the interest tax shield benefits of debt financing and the costs of
financial distress associated with issuing debt.
Identify which of the two theories is described by the statement.
O Pecking-order hypothesis
O Trade-off theory
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