Assumptions for this question: no tax; no distress; no transaction cost; assets don’t change; no information...

Assumptions for this question: no tax; no distress; no transaction cost; assets don’t change; no information asymmetry.

When firms need outside financing, they can choose to issue bonds or stocks. Can this choice influence the firm’s capital structure and market value?

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Expert Solution

When there is an assumption of no tax as well as no financial distress and no transaction cost along with no information asymmetry and when the firm will be needing outside financing, it should go for debt financing because in case, there is a debt financing it would be helpful all the company because there would not be any financial distress risk and there should not be any existence of information asymmetry.

The capital structure does not be meaning much because either the company can go for equity or the company can go for debt so it will generally would not matter much because there are no external factors and it is believed that markets are perfect as there are no existence of any tax and any financial distress so it would be the choice of the company.

If the company does not want to lose the control over its majority stake and it would like to retain the control, then it should be opting for the debt capital over equity capital.

jeff jeffy answered 1 year ago

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