JJJ Corp.has $10 million in assets and is currently financed with 100 percent equity.The firm decides to switch to a 60 percent equity/40 percent debt structure and decides to sell $4 million of debt and use the proceeds to retire $4 million in equity today.This is an example of:

Question

Quizplus · Accepted Answer

This is an example of active capital structure management, as the firm is actively changing its capital structure by issuing debt and retiring equity. It is not an example of underinvestment, which refers to the situation where a firm invests less than the optimal amount. It is also not an example of the Modigliani-Miller theorem in practice, as this theorem only applies under certain assumptions and may not hold in the real world.

JJJ Corphas $10 Million in Assets and Is Currently Financed with with 100