The Theory That Managers May Prefer Internal Sources of Funds

question 60

Multiple Choice

The theory that managers may prefer internal sources of funds to the lowest cost source of funds is known as

• A) the Modigliani and Miller Proposition.
• B) tradeoff theory.
• C) financial stress avoidance theory.
• D) pecking order theory.

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Definitions:

Discount Factor

A multiplier used in discounting to calculate the present value of future cash flows or earnings.

Working Capital

The difference between a company's current assets and current liabilities, indicating the liquidity and short-term financial health of the business.

Discount Rate

The interest rate used to discount future cash flows to their present value.

Salvage Value

The assessed salvage value of an asset at the close of its lifespan.