According to the Signaling Theory, When Should a Firm Use

question 41

Multiple Choice

According to the signaling theory, when should a firm use debt to finance beyond the normal target capital structure?

• A)When the debt/assets ratio is greater than one
• B)When marginal tax shelter benefits are equal to marginal bankruptcy-related costs
• C)When investors and managers have identical information about the firm's prospects
• D)When the firm has favorable prospects
• E)When the firm is entirely equity financed

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Definitions:

Commodities

Basic goods used in commerce that are interchangeable with other goods of the same type, often used as inputs in the production of other goods or services.

Prices

The monetary value assigned to goods or services, representing the amount a buyer pays to a seller in a market transaction.

Income

The income earned, usually periodically, from labor or investment returns.

Prices

The sum of money anticipated, needed, or provided as payment for an item.