The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other factors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capital structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? O Firms with volatile earnings O Firms with stable earnings Based on your understanding of the capital structure theories, identify the best option for the missing part of the statement. According to signalling theory, if managers expect the firm's stock price to decrease, they are ???? to raise capital through equity financing. O Encouraged O Discouraged A leveraged buyout (LBO) helps the firm ???? both its excess cash flows and managers' temptation to incur wasteful expenses. O Reduce O Increase Firms that maintain an adequate reserve borrowing capacity will be able to ???? money at a reasonable cost when good investment opportunities arise. O Borrow O Lend