Chapter 16.8, Problem 16.8CCQ

Summary Introduction

To discuss: The differences in the implications of pecking-order and static theory.

Introduction:

The static theory of capital structure states that the borrowing of the company at a certain point where the benefits of tax from an additional dollar in debt is accurately equivalent to the cost, which arises from financial distress of a company. The fundamental element in the pecking-order theory is that the companies desire to utilize the internal financing whenever possible.