4. If a higher ROE is desirable, why don't companies take on large amounts of debt? a. Additional debt reduces the risk to investors since their investment in the company is less b. Companies will low leverage more efficient c. Companies with lower leverage are more attractive to investors d. Highly leveraged companies are less efficient e. The cost of debt will eventually exceed the return on the additional assets acquired from the debt financing

4. If a higher ROE is desirable, why don't companies take on large amounts of debt? a. Additional debt reduces the risk to investors since their investment in the company is less b. Companies will low leverage more efficient c. Companies with lower leverage are more attractive to investors d. Highly leveraged companies are less efficient e. The cost of debt will eventually exceed the return on the additional assets acquired from the debt financing

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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2. Which of the following is false about the under-investment problem? The under-investment problem is greatest for all-equity firms Under-investment leads to a reduction in firm value Equity holders in levered firms may not invest in some positive NPV projects due to the transfer of value to debt-holders Risk-shifting leads to a transfer of value from debt-holders to equity holders Under-investment arises when shareholders forgo positive NPV projects if increase in equity value is greater than the amount to be raised
Q.A low debt ratio, compared to other industry competitors with similar operating leverage, most likely means the firm has A. a higher cost of capital than the competition. B. a higher EVA than the competition. C. a lower bond rating than the competition. D. none of the above.
8. Which of the following does the trade-off theory predict? A. Bankruptcy costs mean having no debt is always optimal. B. Reducing leverage always reduces firm value. C. In the long run the firm's capital structure converges to the optimal one. D. None of the above.
Which of the following can be the effect of leverage on the WACC if corporate taxes are considered? Increased leverage will decrease the WACC. An increase in leverage will be offset by a decrease in equity financing, thus leaving WACC unchanged. Increased leverage will increase the WACC. Changes in leverage will affect the WACC only if the interest rate on debt changes.
What affect would an increase in the costs of bankruptcy have on the capital structure of a firm? Question 4 options: Higher bankruptcy costs make debt less expensive, so firms will use more debt and less equity. Higher bankruptcy costs make debt more expensive, so firms will use less debt and more equity. Bankruptcy costs have no impact on the capital structure decision.