Under the signaling theory of debt, why can a high level of leverage credibly signal that managers believe the firm is a good type?Single choice

A

Taking on leverage is costless for every firm, so any firm can adopt it without consequence.

B

A weak firm gains more from leverage because financial distress generates extra operating cash flow.

C

Issuing debt legally compels investors to accept management’s private valuation.

D

Debt removes all agency conflicts and guarantees that every project has positive NPV.

E

A strong firm anticipates a low chance of default, whereas a weak firm imitating the same leverage would bear a far higher expected cost of distress.

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