2.122The financing choice is vital to every firm, as the optimal capital structurebetween debt and equity impacts the value of the firm as well as its share price.However, financial managers are often unclear on the benefits of financialleverage.Required:Explain, with the use of an example, how financial leverage benefits the returns ofthe business.

2.122The financing choice is vital to every firm, as the optimal capital structurebetween debt and equity impacts the value of the firm as well as its share price.However, financial managers are often unclear on the benefits of financialleverage.Required:Explain, with the use of an example, how financial leverage benefits the returns ofthe business.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 5QTD

See similar textbooks

Similar questions

Please solve
Which of the following is a valid reason for a firm not to use as much debt as it can raise? Group of answer choices The use of more debt is expected to result in an increase in the firmʹs cost of capital when everything is considered More debt will increase the firmʹs riskiness All of them are valid reasons for a firm to use less debt than might be available The use of more debt is expected to result in a lower price/earnings ratio
A firm's cost of capital indicates [Select] A firm must earn [Select] provided. the risk of the firm's assets. to compensate investors for the financing they hav The required return for a firm is the same as [Select]
Answer the following question in essay. What do you understand by current ratio? What are it uses? What are its limitations? Ratio analysis is widely used as a tool of financial analysis, yet it suffers from various limitations. Explain. How can solvency of a firm be measured? What you understand by Liquidity ratios? Discuss their significance. Page 1 Module PSFM08 MANAGERIAL ACOUNTING WITH FINANCIAL ANALYSIS AND REPORTING Explain the importance of profitability ratio. How they are worked out?
Managing companies to a Target Optimal Capital Ratio requires which of the following for managers to think through debt has the cheapest cost of capital, but adding too much will increase cost of debt and cost of equity cost of debt requires confidence in achieving certain credit ratings, resulting in better debt cost confidence cost of equity requires estimates on risk, returns and growth expectations on tax rates being relatively stable all of the above
5. Many factors influence capital structure decisions; and as we will see, determining the optimal capital structure is not an exact science. Therefore, even firms in the same industry often have dramatically different capital structures. Define the optimal capital structure and differentiate it from the target capital structure. Name four factors that influence a firm's target capital structure. In what sense does setting the target capital structure involve a trade-off between risk and return? Why might market conditions cause a firm's actual capital structure to vary from its target level?
1. What are some factors that affect capital structure decisions made by management? What are the arguments in support of using debt as part of the capital structure? 2. Does capital structure influence the value of a firm? Why or why not?
How many statements below are correct about the Modigliani-Miller theorem? i. The theorem is not an exact description of reality. ii. The theorem provides a benchmark to understand how the capital structure could affect WACC. iii. The theorem implies that firms have benefited from financing with debt due to a higher required rate of return on debt compared with equity. iv. The value of the firm is not affected by its capital structure under any assumptions.
Financial markets: efficient and other. How are financial firms able to make profits? Under what circumstances are their profits limited?
Please answer this in short-way is okay. thank you
When a firm has businesses with different risk profiles, different investments can have different costs of equity and capital. What is the relationship between the firm’s cost of equity and capital and its projects’ costs of equity and capital?
Explain how you will apply in real life the following AXIOMS of FINANCIALMANAGEMENT AXIOM 1: RISK-RETURN TRADE OFFAXIOM 2: TIME VALUE OF MONEYAXIOM 3: CASH NOT PROFIT IS KINGAXIOM 4: INCREMENTAL CASH FLOWSAXIOM 5: EFFICIENT CAPITAL MARKETSAXIOM 6: THE CURSE OF COMPETITIVE MARKETSAXIOM 7: AGENCY PROBLEMAXIOM 8: TAXES BIAS BUSINESS DECISIONSAXIOM 9: ALL RISK IS NOT EQUALAXIOM 10: ETHICAL BEHAVIOR IS DOING THE RIGHT THING AND ETHICALDILEMMAS ARE EVERYWHERE IS FINANCE.