Question
Under the trade-off theory, what value equation describes a levered firm?
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Answer
Levered value equals unlevered value plus tax shield minus distress costs.
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Question
Under trade-off theory, when is a firm's capital structure optimal?
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Answer
When marginal tax-shield benefit equals marginal distress cost.
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Question
If a firm issues debt only after exhausting retained earnings, which theory best explains the behavior?
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Answer
Pecking order theory.
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Question
Why is capital structure irrelevant in MM's no-tax world?
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Answer
Investors can create or undo leverage themselves via homemade leverage.
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