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  3. [6 points] if a firm becomes more risky (for insta

[6 points] If a firm becomes more risky (for instance, more volatile stock price), then...

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Accounting

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[6 points] If a firm becomes more risky (for instance, more volatile stock price), then we might initially think that firm value would decline, because the present value of future cash flows decreases with a higher discount rate. However, empirical evidence suggests the opposite for young, small and R&D intensive firms (firm value tends to increase with increased volatility). Use the topics covered in this class to help explain this evidence. [6 points) Empirical evidence shows that highly profitable firms tend to have lower debt ratios (debt to equity, debt to total capital, debt to assets, etc.). Briefly explain if this evidence supports or does not support the trade-off theory of capital structure. Also, briefly explain if this evidence supports or does not support the pecking order theory of capital structure

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