The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and otherfactors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capitalstructure 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 costsFirms with a higher proportion of variable-versus-fixed costsBased 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.DiscouragedEncouragedAccording to the windows of opportunity theory, managers ???? in efficient markets.O Don't believeBelieveUnder the pecking-order hypothesis, a firm will raise capital by using its net income, selling its marketable securities, issuing debt, and then issuingstock as the last resort. This statement is ????.O TrueO FalseSeveral dominant theories try to explain why financial managers make the capital structure decisions that they do. The following statement describesone 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 offinancial distress associated with issuing debt.Identify which of the two theories is described by the statement.O Pecking-order hypothesisO Trade-off theory

The capital structure refers to the combination of debt and equity which is used in financing its…

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

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 2QE