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If studies show that all the firms that have issued shares (stock) over the past several...

If studies show that all the firms that have issued shares (stock) over the past several years have no existing debt, which one capital structure theory does this observation contradict? (A) Pecking Order, (B) Market Conditions, (C) Trade off.

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Answer #1

If the firm have issued its shares and they have no debt that means that it is a straight contradiction to the trade off theory because trade off theory focuses on optimum capital structure with the mix of equity capital and debt capital. It focuses on obtaining debt, because it provides with and interest tax shield which is to be traded off with cost of financial distress of debt.

market conditions theory related to the under pricing of IPO and packing order theory related to internal source of Financing while formation of optimum capital structure.

Show the correct answer would be option ( C) Trade off theory.

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