Document Table Design Layout A. Normal Heading 1 19. Which of the following is N

Question

Document Table Design Layout A. Normal Heading 1 19. Which of the following is NOT an implication of the pecking order theory of capital structure? A On average, a firm's stock price drops when it announces an equity issue. B. Firms may want to maintain a reserve of cash or unused borrowing capacity. C. More-profitable firms (all else equal) should have higher debt ratios. D. Firms may fail to undertake positive-NPV projects if they would have to be financed with a new issue of equity 21. Which of the following statements regarding interest tax shields is correct? A. Taxes are reduced by the amount of a firm's interest-bearing debt. B. Taxable income is reduced by the amount of a firm's interest-bearing debt. C. Taxes are reduced by the amount of the interest on a firm's debt. D. Taxable Income is reduced by the amount of the interest on a firm's debt.

Explanation / Answer

19.

Correct option is > C. More-profitable firms (all else equal) should have higher debt ratios.

As per pecking order theory, new project requires issues of new debt because debt has lowest cost of issuance. Theory doesn’t state for issuing new debt when the profits are high, debts are preferred when there is financing need.

20.

Correct option is > D. Taxable income is reduced by the amount of the interest on a firm's debt.

Taxable income is reduced when the debt is issued. The interest cost reduces the firms profit hence, that lowers the taxable income. The taxable income is reduced by the amount of interest paid on debt.

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