Question 17

Which of the following statements best describe the trade-off theory of capital structure?

Group of answer choices

The lenders bear the expected bankruptcy costs for the firm.

More than one of the other statements is correct.

Firms should have as much debt as possible.

Trade-off theory does not suggest that there is an optimal capital structure.

None of the other statements is correct.

Question 18

Which of the following statements best describe how capital structure can affect the firm through underinvestment?

Group of answer choices

Firms close to bankruptcy will pass on positive NPV projects because no one will be willing to fund them.

Firms close to bankruptcy will find it difficult to fund positive NPV projects from new shareholders because the potential shareholders will require a substantial discount.

Underinvestment can occur when gains from a positive NPV project accrue mostly to shareholders when the firm is close to bankruptcy.

More than one of the other statements is correct.

None of the other statements is correct.