The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? Firms that have relatively lower business risk compared to other firms in their industry Firms that have relatively higher business risk compared to other firms in their industry According to signalling theory, a firm with a very positive outlook might tend to use debt financing opportunities arise. 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: 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. Identify which of the two theories below is described by the statement. Trade-off theory Pecking-order hypothesis The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? Firms that have relatively lower business risk compared to other firms in their industry Firms that have relatively higher business risk compared to other firms in their industry According to signalling theory, a firm with a very positive outlook might tend to use debt financing opportunities arise. 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: 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. Identify which of the two theories below is described by the statement. Trade-off theory Pecking-order hypothesis