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Published by: vaish2u8862 on Jul 21, 2013
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06/03/2015

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Trade off theory

• Objective of the theory:Identify the optimal debt-to-equity ratio as the level at which the two offset each other. • It states:There is an advantage to financing with debt, The marginal benefit of further increases in debt declines as debt increases, while the marginal cost increases.

causing an optimum capital structure. D/E*. there is a trade-off between the interest tax shield and bankruptcy. .e.As the Debt equity ratio (i. leverage) increases.

risks and value than outside investors.Pecking order theory • Suggested by Donaldson in 1961 • Objective of the Theory:Prioritize the sources of financing for companies according to the cost of financing • Assumption of theory:managers know more about their companies prospects. .

Internal financing 2.Debt 3.equity .Pecking order theory Sources of Financing and Signals sent:1.

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