Which of the following factors is MOST closely related to the Pecking Order Theory of how...
Which of the following factors is MOST closely related to the Pecking Order Theory of how firms determine capital structure?
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A. Information signaling of issuing securities.
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B. Tax impact of interest payments.
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C. Homemade leverage.
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D. Analysis of marginal benefit of the tax shield vs marginal expected costs of financial distress.
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E. Probability of bankruptcy.
Homework Answers
The required answer is option is B i.e. Tax impact of interest payments.
According to pecking order theory firms determine their capital structure on the basis of growth opportunity, Assets Structure, Tax rate and Dividend payment rate and in the above question Tax impact of interest payment is most closely related factor to pecking order theory. Since when firm included debt in their capital structure then they able to save tax on the payment of interest portion.
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