4. Which of the below statements is false about the Static Tax Clientele Theory of payout policy?Investors with high capital gains tax relative to marginal income tax prefer cashdividendsAn individual company cannot increase its value by changing its payoutpolicyCompanies with high dividend payout rates attract investors with relatively low taxratesThere is a static equilibrium where companies with low dividend payout rates attract investors with relativelyhigh tax ratesNone of theabove

According to the static tax clientele hypothesis of payout policy, investors choose businesses with…

Answered: 4. Which of the below statements is…

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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Which of the following statements is CORRECT? * Assume a corporation has less debt than what is ideal. Increasing the use of debt to reach its optimum capital structure would lower the cost of both debt and equity financing. There is no reason to believe that changes in the personal tax rate will have an effect on firms' capital structure decisions. Assuming everything else is equal, a firm with high business risk is more likely to increase the use of financial leverage than a firm with low business risk. In general, a company with low operating leverage has a small percentage of its total costs in the form of fixed costs. If a company's after-tax cost of equity exceeds its after-tax cost of debt, it can still lower its WACC by using more debt.
The interest tax shield adds value to a levered (part debt part equity) firm. A True B False
Discuss why evaluating vertical equity simply based on tax rate structure may be less than optimal.
Please answer MCQ
Assume that the tax on dividends and the tax on capital gains is the same. All else equal, what would a prudent investor prefer? A. More information is needed. B. The prudent investor would prefer dividends—a dollar today is always worth more than a dollar to be received in the future. C. The prudent investor would be indifferent between receiving dividends or capital gains. D. The prudent investor would prefer capital gains—the capital gain tax liability can be deferred until gains are realized.
"Executives would prefer to show lower earnings per share because the company's tax bill will be reduced." Discuss
How would an increase in corporate taxes tend to affect an average firm’s capitalstructure? What about an increase in the personal tax rate?
The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Charles Underwood Agency Inc. has an expected net operating profit after taxes, EBIT(1 – T), of $17,400 million in the coming year. In addition, the firm is expected to have net capital expenditures of $2,610 million, and net operating working capital (NOWC) is expected to increase by $30 million. How much free cash flow (FCF) is Charles Underwood Agency Inc. expected to generate over the next year? $14,820 million $19,980 million $321,693 million $14,760 million…
4. Classify each of the following factors/cases based on whether they favor a low dividend policy or high dividend policy? (explain why) A. The tax on capital gains is deferred until the gain is realized. B. Few, if any, positive net present value projects are available to a firm. C. A majority of the shareholders have a low tax rate. D. A majority of the shareholders have better investment opportunities than the firm. E The presence of an agency conflict with the company's senior managers.
It has been suggested that in a world with only corporate taxation the value of the firm = the value of all equity financed + the present value of tax shield on debt finance How far do existing capital structures of companies compare with the most appropriate structure according to the equation?
Under the trade-off theory, lowering the corporate tax rate will incentivize companies to increase the ratio of debt in their capital structure. Question options: a) True b) False
Modigliani and Miller Proposition II states that: the optimal capital structure occurs when the marginal cost of distress equals the marginal benefit of interest tax shields the cost of cost of levered equity is equal to the cost of unlevered equity, in the absence of taxes, since the value of the levered firm equals the value of the unlevered firm. the capital structure if the firm is irrelevant, regardless of the corporate tax rate. the cost of levered equity is equal to the cost of unlevered equity plus a premium that is proportional to the (market value) debt-to-equity ratio

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