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 signal.

Question

Quizplus · Accepted Answer

Issuing new equity can be perceived by investors as a signal that the firm's stock is overvalued, leading to a negative market reaction. Therefore, firms may prefer debt to avoid this negative signal.

Debt May Be the Preferred Form of External Financing for Many