Under the trade off theory, how will a government loan guarantee impact financing? A

Finance Dec 18, 2020

Under the trade off theory, how will a government loan guarantee impact financing?

A. Prefer to issue debt

B. Prefer to issue stock

C. Prefer internal money

D. No impact

Expert Solution

The answer is A. Prefer to issue. A government loan guarantee would make a firm's debt issue less risky to the public. As a result, they'd be willing to accept a much lower rate of interest, which means inexpensive financing for the company. All things considered, the economic trade-off favors debt financing over equity financing.

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