Mopani Ltd. buys, process and freeze dries, Mopani worms for consumption using a variety of industrial packaging techniques. The company has been successful, but, when the company was young, it borrowed heavily at a high rate. It is now considering two capital structures. The two options the company needs to choose from is as follows:

1. Refinance its debt at a lower cost

2. Issue equity and retire its debt

Question 6 (1)

One of the managers of Mopani Ltd. noted that a recent internal report valued the company at a discount of 30% relative to its market price.

Choosing the equity option based primarily on this discount (the difference between the internal valuation and the market price) is an example of which of the following theories?

The management has decided that it will only do one or the other.

a.

Agency theory

b.

Capital structure irrelevance theory

c.

Dividend irrelevance theory

d.

Market timing theory