Optimal Capital Structure Theories

What assumptions would cause capital structure to matter and affect a value of a firm?

corporate taxes, financial distress

With the incorporation of taxes, how is M&M Proposition 1’s equation changed

value of levered firm = value of unlevered firm + present value of tax shield

EBIT is taxed at the _____ rate

corporate

Any effect from personal tax is likely to be (small/big)

small

Direct bankruptcy costs tend to be a ______ of firm value, around ____%

small percentage, 5

Indirect bankruptcy costs tend to be a _____ of firm value, around ___ to ____ %

substantial percentage, 10, 20

The approach to an optimal capital structure is called the

tradeoff theory

The tradeoff theory explains

the approach to choosing an optimal capital structure

Undervalued stocks wish to issue ____

debt

Overvalued firms wish to issue ____

stock

Stock is issued by firms that are (over/under) valued

over

Debt is issued by firms that are (over/under) valued

under

What is the pecking order of issuance from top to bottom?

internal finance, debt issuance, stock issuance

What is the pecking order of issuance from bottom to top?

equity issuance, debt issuance, personal finance