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Business
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Number of pages / Number of words: |
4 / 1082 |
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The theories below try to address some of these imperfections, by relaxing assumptions made in the M&M model.
Trade-off theory
Trade-off theory allows bankruptcy costs to exist. It states that there is an advantage to financing with debt, the tax benefit of debt and there is a cost of financing with debt, the bankruptcy costs of debt...
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It states that there is an advantage to financing with debt, the tax benefit of debt and there is a cost of financing with debt, the bankruptcy costs of debt. The marginal benefit of further increases in debt declines as debt increases, while the marginal cost increases, so that a firm that is optimizing its overall value will focus on this trade-off when choosing how much debt and equity to use for financing...
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General points of the essay
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