TUU WP20 Question 6 Which of the following statements is correct regarding capital structure? 1. The trade-off theory of capital structure suggests that companies with high and stable operating cash flow should be more conservative in raising debt because of their high expected distress costs and distress probability. II. The pecking order theory of capital structure suggests that firms prefer raising capital through debt to raising capital through convertible securities. 111. The market timing theory of capital structure suggests that if a firm requires funding during a period when its market-to-book ratio is high, it is more likely to issue equity. IV. The empirical evidence on capital structure shows that most firms have a high debt-to- equity ratio to take advantage of the tax benefit of debt. A. I and II only B. II and Ill only C. III and IV only D. 1, II and Ill only E. None of the choice combinations given in A., B., C., and D. are correct. e Q C