Question

1. Most financial managers measure debt ratios from their companies’ book balance sheets. Many financial economists emphasize ratios from market-value balance sheets.
   1. Which is the right measure in principle?
   2. Does the trade-off theory propose to explain book or market leverage?
   3. Does the pecking-order theory propose to explain book or market leverage?

Answer 1

a,The correct measure standard is the proportion that is gotten from the market value balance sheets. Book balance sheets speak to the authentic values of obligation and value that is altogether not the same as the values of market. Any adjustments in the capital structure are recorded at current market values.

b The trade-off theory proposes to clarify the market leverage. Increment or abatement paying off debtors esteems are recorded at market values: For instance, a choice in diminishing the odds of budgetary trouble by retirement of obligation implies that current obligation is bought at market esteem and subsequently the abatement in premium assessment shields relies upon the market estimation of the obligation.

c.pecking-order theory propose to explain market leverage The pecking order theory expresses that an organization ought to like to fund itself first inside through held profit. On the off chance that this wellspring of financing is inaccessible, an organization should then fund itself through obligation. At last, and if all else fails, an organization should back itself through the giving of new value.