Corporate Finance【 Reading 29,Reading30】
Which of the following statements regarding how different capital structure theories impact managers’ capital structure decisions is most accurate? According to: A)
| the static trade-off theory, debt will not be used if a company is in a high corporate tax bracket. |
| B)
| pecking order theory, issuing new debt is preferable to issuing new equity. |
| C)
| MM’s propositions (assuming no taxes), companies have an optimal level of debt financing. |
|
Pecking order theory is related to the signals management sends to investors through its financing choices. Financing choices follow a hierarchy based on visibility to investors with internally generated funds being the least visible and most preferred, and issuing new equity as the most visible and least preferred. Under static trade-off theory, higher tax brackets result in greater tax savings from using debt financing. Under MM’s propositions (assuming no taxes), capital structure is irrelevant and there is no optimal level of debt financing. |