Over the years, researchers have proposed numerous theories to explain what firm
ID: 1227355 • Letter: O
Question
Over the years, researchers have proposed numerous theories to explain what firms' capital structures should look like. Which of the following is not supported by theoretical and empirical research to date? Tax rates fall at high debt levels. Many large, successful firms use much more debt than the trade-off theory suggests. The optimal debt level occurs when the tax savings of additional debt are just offset by the increase in bankruptcy costs. A firm's cost of debt increases as its debt-to-assets ratio increases. Suppose that signaling theory is correct. Harris Inc. is planning a large expansion and needs to raise new capital. If management thinks the firm's stock is undervalued and its prospects are very good while investors are unaware of these opinions, will management want to raise capital using debt or equity? Debt EquityExplanation / Answer
6.
A.
Correct Answer:
Many large, successful firms use much more debt than the trade of theory suggests.
Explanation
It has been found in research that many large and successful firms use lesser amount of debt in their capital structure. Thus, the proposed idea of heavy use of debt by big and successful companies is not supported.
B.
Correct Answer:
Debt
Explanation:
As per the signaling theory, firm would not like to share the profit to new shareholders as shares are undervalued and their price will increase in near future. Thus, they will raise debt for the expansion plans.
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