Question

The issuance of equity for a firm with various financing alternatives signals that the firm has unfavorable prospects which it wants to share with new shareholders according to the signaling theory of capital structure.

a) true
b) false

Answer 1

Option b) False

Step-by-step explanation:

Capital structure

This is usually defined as a composition or the combination of debt and equity that are used to finance a firm.

Signaling theory

According to this theory, It states that actions are taken by a firm to send "signals" to shareholders. It states that firms that uses issue debt to raise funds are signaling or projecting that their future prospects are favorable.

In this theory, managers do have information about their firm's prospects than do outside investors. It is also referred to as an action taken by a firm's management that gives possible clues to investors about how management looks at the firm's capital prospects. It centers on the ability to borrow money at a reasonable cost when good investment opportunities comes their way.