Trade Off Theory

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Trade off theory :- The trade off theory explains the advantage and cast that are attached in acquiring the wan. The theory talks about offsetting the debt and the cost of debt, where the firm is in a position where the firm can avail maximum benefit at lowest costs. The firm need to raise the necessary funds through debt financing up to a point where it maximize the value of the firm and the costs of those debts should not exceeds the benefits of the firm This action taken by financial substitution will certainly change the inflow for the firm. So check out this thing the author has proposed a hypothesis .According to this hypothesis, the collection of more finances by the firm means that the inflows of the firm are not in a good position rather the inflow are more that outflows so the firm need to be financed. This type of situation for the firm’s investor s not encouraging. Inflows being less change its financial that firm will change its financial policy about financing its operation and this outflow being more then inflows suggests that future is not certain from the leans and its interest payments

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Trade off theory

Transcript of Trade Off Theory

Page 1: Trade Off Theory

Trade off theory:-The trade off theory explains the advantage and cast that are attached in acquiring the wan. The theory talks about offsetting the debt and the cost of debt, where the firm is in a position where the firm can avail maximum benefit at lowest costs. The firm need to raise the necessary funds through debt financing up to a point where it maximize the value of the firm and the costs of those debts should not exceeds the benefits of the firmThis action taken by financial substitution will certainly change the inflow for the firm. So check out this thing the author has proposed a hypothesis .According to this hypothesis, the collection of more finances by the firm means that the inflows of the firm are not in a good position rather the inflow are more that outflows so the firm need to be financed. This type of situation for the firm’s investor s not encouraging. Inflows being less change its financial that firm will change its financial policy about financing its operation and this outflow being more then inflows suggests that future is not certain from the leans and its interest payments point of view which is discouraging for the investor.The other hypothesis which we call “informational asymmetry hypothesis” Mayer and massif (1984) suggest that the management of a particular firm has a good idea about real value and position of the firm.

Packing Order theory:The theory which is called “Packing order theory” was put for ward in 1984 by mayors, According to pecking and order theory the capital structuring of a particular firm depends on its preference. The firm may decide to finance its operation from its own internal sources rather then external sources or the firm may decide to the firm thorough the issuance of secretes which will involve high risks. All such options are quail able to firm and the firm makes decision according to its preferences.