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Home/Business & Economics/Explain what capital structure theory best describes the following situation. A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value.

Explain what capital structure theory best describes the following situation. A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value.

According to the traditional approach to capital structure, the cost of debt is always lower than the cost of equity due to the tax shield, which will ultimately lead to an increase in the enterprise value and EPS. However, the increase in debt will also lead to increased risks, which may offset the benefits from additional debt if the leverage level is above the optimal ratio.

In this case, the investors saw no significant risks, which increased their interest in the stock. This situation can also be explained by the pecking order theory, which takes into consideration information asymmetry. Shareholders will believe that CEO was confident that the company could pay off the debt, as he saw the company as undervalued, which increased the share price.

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Academic.Tips. (2023) 'Explain what capital structure theory best describes the following situation. A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value'. 26 March.

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Academic.Tips. (2023, March 26). Explain what capital structure theory best describes the following situation. A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value. https://academic.tips/question/explain-what-capital-structure-theory-best-describes-the-following-situation-a-ceo-decides-to-borrow-50000-in-new-debt-and-the-share-prices-rise-dramatically-he-then-decides-to-sell-half-of-his-o/

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Academic.Tips. 2023. "Explain what capital structure theory best describes the following situation. A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value." March 26, 2023. https://academic.tips/question/explain-what-capital-structure-theory-best-describes-the-following-situation-a-ceo-decides-to-borrow-50000-in-new-debt-and-the-share-prices-rise-dramatically-he-then-decides-to-sell-half-of-his-o/.

1. Academic.Tips. "Explain what capital structure theory best describes the following situation. A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value." March 26, 2023. https://academic.tips/question/explain-what-capital-structure-theory-best-describes-the-following-situation-a-ceo-decides-to-borrow-50000-in-new-debt-and-the-share-prices-rise-dramatically-he-then-decides-to-sell-half-of-his-o/.


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Academic.Tips. "Explain what capital structure theory best describes the following situation. A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value." March 26, 2023. https://academic.tips/question/explain-what-capital-structure-theory-best-describes-the-following-situation-a-ceo-decides-to-borrow-50000-in-new-debt-and-the-share-prices-rise-dramatically-he-then-decides-to-sell-half-of-his-o/.

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"Explain what capital structure theory best describes the following situation. A CEO decides to borrow $50,000 in new debt, and the share prices rise dramatically. He then decides to sell half of his own personal shares, and when this is reported in the Wall Street Journal, the share prices drop dramatically in value." Academic.Tips, 26 Mar. 2023, academic.tips/question/explain-what-capital-structure-theory-best-describes-the-following-situation-a-ceo-decides-to-borrow-50000-in-new-debt-and-the-share-prices-rise-dramatically-he-then-decides-to-sell-half-of-his-o/.

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Explain what capital structure theory best describes the following situation. The corporate tax rate rises from 35% to 45%, and the XYZ Corporation decides to issue more debt. A year later, bankruptcy laws are changed to become much stricter and costlier. XYZ then decides to pay back half of its debt.
Research and determine what type of government exists in the municipality you reside in. Once you have determined the type of local government, provide an outline of the budget process, including department allocations for the law enforcement and Office of Emergency Management (OEM) organizational units.
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