Which of the following supports the trade-off theory of capital structure?
A) Companies use cash on hand first, since issuing equity and debt is expensive.
B) A company's capital structure is the result of past equity and debt issuance decisions.
C) Companies have a target capital structure.
D) a and b.

Question

Quizplus · Accepted Answer

The trade-off theory states that companies have a target capital structure, which balances the costs and benefits of debt and equity financing. Choice A supports the pecking order theory, which suggests that companies prioritize financing through internal funds before resorting to external financing. Choice B suggests that a company's capital structure is a historical outcome rather than a deliberate choice, which is not consistent with the trade-off theory. Therefore, the best choice is C.

Which of the Following Supports the Trade-Off Theory of Capital