Capital Structure Theories
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Questions and Answers

Which theory emphasizes the importance of rationality and the reduction of asymmetric information between management and shareholders?

  • Value irrelevance theory
  • Pecking Order
  • Trade off
  • Agency Theory (correct)

    • What does market timing theory suggest firms should do when their share price is overvalued?

  • Repurchase stock (correct)
  • Issues new stock
  • Increase debt
  • Decrease debt

    • What is the main focus of capital structure theories?

  • Interest rates
  • Debt and equity balance (correct)
  • Market trends
  • Fluctuations in stock price

    • Which version of the market timing theory suggests that managers issue equity when the cost of equity is low?

    <p>2nd version</p> Signup and view all the answers

    What does the pecking order theory suggest firms should do when market interest rates are low?

    <p>Issue debt</p> Signup and view all the answers

    Match the following concepts with their descriptions:

    <p>Agency Theory = Helps explain conflicts between managers and shareholders in capital structure decisions Managerial Behavior = Tendencies of managers to prioritize their own interests and the importance of acting in the shareholders' benefit Monitoring and Control = Role played by shareholders in monitoring and controlling managers and the cost associated with such monitoring Pecking Order Theory = How agency theory leads to the development of this theory</p> Signup and view all the answers

    Match the following actions with the responsible party:

    <p>Prioritizing own interests over shareholders = Managers Controlling managers = Shareholders Acting in the shareholders' benefit = Managers Monitoring managers = Shareholders</p> Signup and view all the answers

    Match the following theories with their main focus:

    <p>Agency Theory = Conflicts between managers and shareholders Pecking Order Theory = Hierarchy of financing sources Managerial Behavior = Tendencies and obligations of managers Monitoring and Control = Role of shareholders in managing the company</p> Signup and view all the answers

    Match the following roles with the associated costs:

    <p>Managers = Conflict of interest with shareholders Shareholders = Costs of monitoring and controlling managers Agency Theory = Conflict resolution between managers and shareholders Pecking Order Theory = Hierarchy of financing costs</p> Signup and view all the answers

    Match the following obligations with the responsible party:

    <p>Prioritize shareholders' interests = Managers Monitor and control managers = Shareholders Resolve conflicts between managers and shareholders = Agency Theory Establish hierarchy of financing sources = Pecking Order Theory</p> Signup and view all the answers

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