as per static trade off theory firms should try to balance the optimum level of debt.
am I correct?
please explain which statement is correct.
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Statement 3 is correct. Imagine the graph about the optimal capital structure. According to static tradeoff theory, each firm has an optimal level of debt for which kc is the lowest (firms irl deviate from that point because market is not static but dynamic).
Statement 1 is incorrect because as a firm raises more and more debt, its ke and kd both will rise. Shareholders will demand a higher return because of agency costs and debtholders will demand a higher return because of bankruptcy costs (among other things).
Statement 2 is also incorrect. According to pecking order theory, firms will first use internal equity and only then move to debt, and finally external equity. The statement says “debt financing is preferable to all equity financing”, which is not true.
I agree
but isn’t it sounding like all firms are operating at that level matlab sabka debt optimum pe hi h
instead of ki chances hai that they can have an optimum level of debt.???
Not really. It says all firms have “an” optimal level of debt, and not all firms have “the” optimal level of debt.
got it
thankyou