The M&M capital structure theories persuasively argue that the optimal long-term debt is not 0.0% debt due
Question:
The M&M capital structure theories persuasively argue that the optimal long-term debt is not 0.0% debt due to the tax shield benefit of debt. The table below shows that, consistent with M&M theories, the average long-run debt to equity ratio in many different industries is positive (e.g., 55% for hotels, 86% for industrial companies, and only 9% for the tech sector). Yet many large technology firms, such as Facebook, Alphabet (Google), and Apple, do not use any long-term debt to finance their operations and new investments.
Explain whether it makes financial sense for big technology firms to use no debt and give up the tax shield benefit of debt. Use terms like R&D under asymmetric information theory, financial distress costs, debt tax shield, and especially signaling theory.?
Public Finance A Contemporary Application of Theory to Policy
ISBN: 978-1285173955
11th edition
Authors: David N Hyman