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Home/Business & Economics/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.

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.

The situation is best explained by the pecking order theory, which introduces the imbalance of information. According to this theory, information asymmetry bears the financial cost. Since the CEO is perceived as an insider, the fact that he sold his shares demonstrated that the information asymmetry existed. Therefore, the cost of capital increased as the perceived risks increased, which led to decreased price share.

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Academic.Tips. (2023) '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'. 26 March.

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Academic.Tips. (2023, March 26). 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. https://academic.tips/question/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-l/

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Academic.Tips. 2023. "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." March 26, 2023. https://academic.tips/question/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-l/.

1. Academic.Tips. "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." March 26, 2023. https://academic.tips/question/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-l/.


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Academic.Tips. "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." March 26, 2023. https://academic.tips/question/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-l/.

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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." Academic.Tips, 26 Mar. 2023, academic.tips/question/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-l/.

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Explain what capital structure theory best describes the following situation. A CEO named Joe Bigwig is known for living large with very expensive cars and a huge mansion. Joe is seeking a large loan from a bank to finance some new projects for his corporation. However, the bank becomes concerned when they find out that he recently used company funds to buy a brand-new company jet and also scheduled numerous business trips to Hawaii and stayed in five-star hotels. The bank tells Joe he will receive the loan only if he agrees to scale back on his personal expenses and not give himself or any other executives a raise until the loan is paid back.
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.
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