Question

Which of the following shows a capital structure shift and a way to interpret that shift as a signal to investors?

A. When a company takes on debt, it signals the company has strong solvency and good prospects.

B. When a company takes on new debt, it signals that there are liquidity issues.

C. When it issues new shares, a company signals that it has great prospects and wants to capitalize.

D. All of these answers.

Answer 1

Capital structure shift means change in the capital structure of the company due to any issues like recession etc.

The right answer is option B.

If it is a well developed company, it always choosed for Equity and not debts. If the company is planning to raise new debts, it means there is a decline in its share market value and it may not be able to raise funds by fresh issue. When it comes to bebt, there is a fixed percentage of return and hence the risk is less so people will invest in it.