Debt may be the preferred form of external financing for many firms because:
A) most firms already have too much equity.
B) tax rates on equity are lower.
C) debt will not adversely affect the firm's financial ratios.
D)equity issuance is considered by investors to be a negative sign.

Question

Quizplus · Accepted Answer

Equity issuance is often perceived by the market as a signal that a firm's stock might be overvalued, leading to a negative reaction. This phenomenon is known as the "signaling theory." Debt financing, on the other hand, does not generally carry this negative connotation and can be more attractive due to the tax deductibility of interest payments.

Debt May Be the Preferred Form of External Financing for Many