1 which is INCORRECT about a perfect capital market? there is no financial frictions such as managerial entrenchment O capital structure will ave an impact for firm value wacc remains constant no matter how leverage changes it is introduced by Franco Modigliani and Merton Miller
1 which is INCORRECT about a perfect capital market? there is no financial frictions such as managerial entrenchment O capital structure will ave an impact for firm value wacc remains constant no matter how leverage changes it is introduced by Franco Modigliani and Merton Miller
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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please can you help me out with Capital structure homework question ?
Transcribed Image Text:1. which is INCORRECT about a perfect capital market?
O there is no financial frictions such as managerial entrenchment
5. which of the following is CORRECT about agency costs?
O debt is always more favorable than equity considering all sorts of agency issues
O capital structure will have an impact for firm value
O debt can mitigate the underinvestment issue
O wacc remains constant no matter how leverage changes
O debt can mitigate the empire building issue
O when risk-shifting issue is severe, firms should tum to debt financing instead of using equity
O it is introduced by Franco Modigliani and Merton Miller
6. in a perfect capital market, a firm currently has $10m debt at cost of 5% and $10m equity at cost of 10%. what should be its unlevered cost of equity before it raises any debt?
2. which of the following is NOT a financial friction that a perfect capital market is free of?
O 10%
O 75%
O transaction costs
O 5%
O interest payment
O 15%
O debt overhang
O none of the above
O risk shifting
7. which of the following is INCORRECT about asymmetric info?
O tis costly for both equity issuer and investers
3. which of the following is NOT an example of financial distress costs?
O in the used car market eample, in equilibrium only bad cars get sold cheap
O equity issuer should disclose information to justily its decisions to reduce anymmetric info
O loss of customers
tis considered as a disadvantage for debt
O higher cost of borrowing
8. a firm maintains a constant level of $15m debt. If the tax rate is 40%, what is the additional firm valued added by the debt if cost of debt is 4%7
dilution of ownership
O 4m
O Sm
O direct costs associated with chapter 7 or 11
O 6m
4. what does the tradeoff theory say?
O optimal leverage happens when marginal tax benefits of debt equals marginal cost of financial distress
9. in a perfect capital market, a 100% equity financed firm has an unlevered cost of equity of 10% and value of $10m. now it raises S5m debt and uses it to buy back shares from the market. if cost o
debt is 5%, what is its new levered cost of equity?
O 15%
O firm should lever up as much as possible
O 10%
O there is a tradeoff between manager-equity holder conflicts and debt-equity holder conflicts
O 5%
O 75%
O there is a tradeoff between tax benefits of debt and agency costs of debt
O none of the above
10. in a perfect capital market, a firm has 10m equity at the cost of 10% and 10m debt at the cost of 5%. now it raises another S5m debt at the same cost of debt and uses it to buy back shares. what
is its new levered cost of equity?
O 10%
O 125%
O 15%
O 75%
O nene of the above
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