1.Which of the following statements regarding how different capital structure theories impact managers’ capital structure decisions is most accurate? According to: A) pecking order theory, issuing new debt is preferable to issuing new equity. B) MM’s propositions (assuming no taxes), companies have an optimal level of debt financing. C) pecking order theory, internally generated funds is the least preferred method of financing. D) the static trade-off theory, debt will not be used if a company is in a high corporate tax bracket. The correct answer was A) 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. 2.Schwarzwald Industries recently issued new equity to help fund a new capital project. What type of signal is Schwarzwald’s choice of financing sending to investors about the future prospects of the firm under the information asymmetry signaling theory and pecking order theory respectively?
| Signaling Theory (Information Assymetry) | Pecking Order Theory |
A) Negative signal Positive signal B) Positive signal Negative signal C Positive signal Positive signal D Negative signal Negative signal The correct answer was D) Signaling theory results from asymmetric information, which refers to the fact that managers have more information about a company’s future prospects than the firm’s owners and creditors. Since managers are reluctant to sell new stock if they think the stock is undervalued, but very willing to sell stock if they think the stock is overvalued, selling stock sends a negative signal about a firm’s future prospects. Pecking order theory, which is related to signaling theory, suggests that managers choose methods of financing based on the visibility of signals they send. Raising equity is the least preferred method of financing under pecking order theory, and it sends a negative signal. | 
发表于 2008-4-17 18:38
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