13a)

What does the trade-off theory say about optimal capital structure?

Choose one option:

1. It is optimal to finance with debt only.

2. It is optimal to finance with only equity.

3. Although there are tax advantages to financing with debt, too much debt can increase the risk of bankruptcy, so that it may be optimal to finance with a combination of debt and equity.

4. Although there are tax benefits to financing with equity, too much equity can increase the risk of bankruptcy, so it may be optimal to finance with a combination of debt and equity.

13.b)

Which of the statements about the pecking-order theory is correct?

Choose one option:

1. It is optimal to have a certain proportion of equity financing due to bankruptcy risk in the event of debt

2. Debt financing sends a worse signal than raising money in the market because debt is risky.

3. It sends the best signal to finance with equity from the market.

4. Raising equity from the market is a bad signal because it means that one believes that the share price may be too high.