Answered step by step
Verified Expert Solution
Question
1 Approved Answer
1) According to the trade-off theory of capital structure, optimal capital structure occurs when the present value of tax savings on account of additional borrowing
1) According to the trade-off theory of capital structure,
- optimal capital structure occurs when the present value of tax savings on account of additional borrowing just offsets the increase in the present value of costs of distress.
- optimal capital structure occurs when the stockholders' right to default is balanced by the bondholders' right to get interest and principal payments.
- optimal capital structure occurs when the benefits of limited liability is just offset by the value of the firm's lawyers' claims.
- None of the options are correct.
2) What does "risk shifting" imply?
- When faced with bankruptcy, managers tend to invest in high-risk, high-return projects.
- When faced with bankruptcy, managers do not invest more equity capital.
- When faced with bankruptcy, managers may make accounting changes to conceal the true extent of the problem.
- When faced with bankruptcy, managers invest in low-risk projects to conserve capital.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started