11. More on capital structure theory Aa Aa The Modigliani and Miller theories ar

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11. More on capital structure theory Aa Aa 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 theorie:s 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. Option 1 Option 2 According to signalling theory, if managers expect the firm's stock price to decrease, they are ???? to raise capital through equity financing. Encouraged Discouraged A leveraged buyout (LBO) helps the firm ???? both its excess cash flows and managers' temptation to incur wasteful expenses. Reduce Increase According to pecking-order hypothesis, a profitable firmm is likely to use ???? debt than a less profitable firm Less More 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: Firms prefer internal funds, but if forced to raise external capital, they prefer debt rather than equity issuance. Identify which of the two theories is described by the statement. O Pecking-order hypothesis O Trade-off theory Flash Player WIN 19,0,0,226 Q3 3.33 © 2004-2015 Aplia. All rights reserved © 2013 Cengage Learning except as noted. All rights reserved. Grade It Now Save & Continue

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Answer:

Firms with a higher proportion of variable versus fixed costs

If managers expect firms price to decrease they are discouraged to raise capital through equity financing

a leveraged buyout (LBO) helps the firm reduce both its excess cash flows and managers temptation to incur wasteful expenses

according to the pecking order hypothesis, a profitable firm is likely to use less debt than a less profitable firm

Pecking order hypothesis

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