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Which capital structure model suggests all firms should carry as much debt as possible? A.Modigliani-Miller with...

Which capital structure model suggests all firms should carry as much debt as possible?

A.Modigliani-Miller with taxes

B.Pecking order theory

C.Tradeoff theory

D.Modigliani-Miller without taxes

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Answer #1

Correct answer is Tradeoff theory

As this theory focuses on advantages of debt financing. It states that as debt capacity accumulates, it will be use to capture tax shields and leverage benefits. In other words, higher debt means higher interest payments and higher tax shield.

Pecking order theory is the wrong ans as it focuses on using retained earnings first.

The other two theories are based on the thing that value of a firm is unaffected by how it is financed.

Hence, the correct answer is Tradeoff theory.

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