IQRA UNIVERSITY

NORTH NAZIMABAD CAMPUS

STRATEGIC FINANCIAL POLICIES

QUIZ-2

NAME OF STUDENT: Muhammad Faizan

REG / ROLL NO. 9948

Please narrative at-least five differential between Pecking theory,

Trade-off theory and MM Theory?

1. Trade off theory considerations help firms determines their

debt capacity, while pecking order theory describes firms'
preferences between different methods of financing.

2. The trade-off theory states that the optimal capital structure

is a trade-off between interest tax shields and cost of
financial distress.

3. The pecking order theory has emerged as alternative theory

to the trade-off theory. Rather than introducing corporate
taxes and financial distress into the MM framework, the key
assumption of the pecking order theory is asymmetric
information. Asymmetric information captures that
managers know more than investors and their actions
therefore provides a signal to investors about the prospects
of the firm.
4. MM Proposition given by Modigliani and Miller is also
known as static trade off theory. Most governments provide
tax benefits on firm's debt payments as interest is generally
tax free. Hence they argued that it is profitable for firms to
finance using debt rather than equity.

5. Pecking order theory said financing from own resources is a

signal of sound financial health of the firm. Also it protects
the firm from the interest burden which falls upon the when
it resorts to loan from outside sources.