Question: There are (2) theories for choosing a capital structure discussed in our text; Trade-Off Theory and Pecking Order Theory. The trade-off theory of capital structure

There are (2) theories for choosing a capital structure discussed in our text; Trade-Off Theory and Pecking Order Theory. Thetrade-off theoryof capital structure states that managers choose a specific target capital structure based on the trade-offs between the benefits and the costs of debt.

What are some key differences associated with each theory and how does the economic climate play a role in each theory?

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