Question

Q1) The trade-off theory of capital structure states that the managers will increase debt to the point at which the costs and benefits of adding an additional dollar of debt are exactly equal.

Select one:

True

False

Q2 A company wishes to undertake a project that costs $85m. It currently has $10m in cash on hand and believes that it can raise $75m in debt and $100m in equity if needed. According to the pecking order theory of capital structure, what percentage of the project's cost will be financed by equity?

Select one:

a. 0%

b. 26.67%

c. 54.05%

d. 100%

Answer 1

1. The given statement is TRUE because the debt benefits should always be compared with the cost of financial distress, related to the debt so the given statement is completely true because manager will increase debt to the point at which cost and benefits are exactly same.

2. Pecking order theory emphasize the least on the equity capital and says that the firm should be adding no equity capital or equity capital should only be added at of the resort.

show the overall percentage of equity capital will be 0% in the overall capital structure.

Correct answer is option ( A) 0%