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9. Alternative capital structure theories The Modigliani and Miller theories are based on several unrealistic assumptions related to the use of debt financing. In reality, there are costs, taxes, and other factors associated with the use of borrowed funds. These costs or effects have led to several theories that explain the impact of these factors on the capital structure decisions made by a firm's managers. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? O Firms with a higher proportion of fixed-versus-variable costs Firms with a higher proportion of variable-versus-fixed costs Based on your understanding of the capital structure theories, identify the best option for the missing part of the statement. its normal target capital structure. According to signaling theory, a firm with a very positive outlook might tend to use debt financing According to pecking order hypothesis, a profitable firm is likely to use debt than a less profitable firm. True or False: Under the pecking order hypothesis, a firm will raise capital by using its net income, selling its marketable securities, issuing debt, and then issuing stock as the last resort. O False True Several dominant theories try to explain why financial managers make the capital structure decisions that they do. The following statement describes one such theory: The firm's debt-equity decision finds the optimal balance between the interest tax shield benefits of debt financing and the costs of financial distress associated with issuing debt. Which of the two theories listed below is best described by the statement. Trade-off theory Pecking order hypothesis