18. Which of the following statements is true? A. Payment on interest on debt is considered an expense, while payment of dividends is a return on capital. B. Unpaid common stock dividends can result in liquidation of the firm. C. One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.
18. Which of the following statements is true? A. Payment on interest on debt is considered an expense, while payment of dividends is a return on capital. B. Unpaid common stock dividends can result in liquidation of the firm. C. One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:18. Which of the following statements is true?
A.
Payment on interest on debt is considered an expense,
while payment of dividends is a return on capital.
B.
Unpaid common stock dividends can result in
liquidation of the firm.
C.
One of the costs of issuing equity is the possibility of
financial distress, while no financial distress is associated with
debt.
19. In the real world with the presence of corporate taxation,
MM Proposition I that VL- Vu does not hold because:
A. levered firms pay less taxes compared with identical
unlevered firms.
B. bondholders require higher rates of return compared with
stockholders.
C. dividends are no longer relevant with taxes.
20. AI Robotics Company will earn $120 in one year if it does
well. The debtholders are promised payments of $80 in one
year if the firm does well. If the firm does poorly, expected
earnings in one year will be $20 and the repayment to
debtholders will only be $10 because of financial distress cost.
The probability of the firm performing well is 60%. If
bondholders are fully aware of these costs, what will the
debtholders pay for the debt? The interest rate on the bonds is
7%.
A. $35.51
B. $38.00
C. $48.59
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