Which of the following statements is/are true about observed capital structures?
I. Firms with higher stability in sales tend to use higher debt ratios.
II. Firms with a higher ratio of general-purpose assets to special-purpose assets tend to have higher debt ratios.
III. Young firms with higher growth rates tend to have higher debt ratios.
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A. B. C. D. E. F.Explanation
Stability of sales implies a stability in profitability. This allows firms to service higher levels of debt without worrying about bankruptcy. Similarly, since general- purpose assets are more valuable as collateral than firm-specific assets, firms with a higher ratio of general-purpose assets to special- purpose assets tend to have higher debt ratios. However, young firms which face higher uncertainty in their project payoffs tend to favor equity financing.