Question

he Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other factors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capital structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? Firms that have relatively higher business risk compared to other firms in their industry Firms that have relatively lower business risk compared to other firms in their industry

Answer 1

Answer: Firms that have relatively lower business risk compared to other firms in their industry

Step-by-step explanation:

The trade-off theory of capital structure simply explains that companies or organizations chooses the amount of both equity finance and debt finance that they'll use while the costs and benefits are being taken into consideration. Businesses are usually financed using both equity and debt options.

The kind of firms are likely to use more leverage are firms that have relatively lower business risk compared to other firms in their industry. When a business is leveraged, this implies that such business or organization has borrowed money so as to buy an asset. Also, organizations can leverage through equity, and this can be done by raising money from the investors.