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? Firms with stable earnings Firms with volatile earnings Based on your understanding of the capital structure theories, identify the best option for the missing part of the statement. According to signaling theory, if managers expect the firms stock price to decrease, they are ???? to raise capital through equity financing. Discouraged Encouraged According to the windows of opportunity theory, managers ???? in efficient markets. Believe Dont believe 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. This statement is ????. 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. Consider this case: Firms prefer internal funds, but if forced to raise external capital, they prefer debt rather than equity issuance. Identify which of the two theories is described by the statement. Pecking-order hypothesis Trade-off theory