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You are the controller of a firm whose CEO believes that debt should always be used to finance long-term expenditures because interest is tax deductible. List and describe other benefits to debt financing. Also, list and describe risks to using debt.
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- Select all that is true about the role of financial managers and the types of financial decisions they make. a. Capital Budgeting function involves planning and determining the firm’s short term investments. b. Determining the appropriate level of inventory is a working capital management function. c. The duties of the financial manager includes determining the capital structure and which projects the firm should undertake. d. Capital structure describes the mix of short-term liabilities a firm uses to finance its short-term assets. e. The optimal financial management strategy of a financial manager is to reduce the overall risk level of the firm. f. Size and timing of cash flows is unimportant in a capital budgeting decision.Which of the following is a function of corporate finance? Select one: a. Handling customer complaints. b. Production planning. c. Preparation of financial statements. d. Making investment and financing decisions.A bank wants to implement a loan pricing model and has to look at several variables to consider. Please select the variable that is incorrectly described. a. A profit margin to provide the bank with an adequate return on capital. b. Risk premium to counter the effect of default risk. c. Cost of funding that include the cost of bonds issued. d. Operating costs that include the cost of interest paid to depositors.
- Debt finance is another source of long term capital for companies.(i) Discuss any three types of debt instruments that are available to companies.(ii) In relation to a company sourcing capital, discuss three benefits of using equity finance.Which of the following is a function of corporate finance? Select one: a. Making investment and financing decisions. b. Production planning. c. Preparation of financial statements. d. Handling customer complaints.Which of the following is most consistent with using debt to reduce agency costs or conflicts? Question 11 options: Increasing debt reduces a firm’s business risk The interest paid on debt reduces taxable income and income taxes The interest paid on debt reduces cash that management of a firm might otherwise waste or use poorly The issuance of debt helps firms increase their credit rating
- Which of these is a main characteristic of debt capital?(a) Investors in debt participate in the ownership of the firm.(b) Investors in debt are paid interest.(c) Debt is more risky for the investor and less risky for the firm.(d) If dividends are not paid, this can lead to foreclosure, legal proceeding and financial distress.A common problem facing any business entity is the debt versus equity decision. When funds are required to obtain assets, should debt or equity financing be used? This decision also is faced when a company is initially formed. What will be the mix of debt versus equity in the initial capital structure? The characteristics of debt are very different from those of equity as are the financial implication of using one method of financing as opposed to the other. Cherokee Plastics Corporation is formed by a group of investors to manufacture household plastic products. Their initial capitalization goal is $50,000,000. That is, the incorporators have decided to raise $50,000,000 to acquire the initial assets of the company. They have narrowed down the financing mix alternatives to two: All equity financing $20,000,000 in debt financing and $30,000,000 in equity financing No matter which financing alternative is chosen, the corporation expects to be able to generate a 10% annual return, before…As a micro-enterprise, which sets of financing are the most likely to be used? *A. Banks and venture capitalistsB. Tax holidays and leasesC. Retained earnings and convertible securitiesD. Public issuance of equity and debt
- Understanding the impact of debt in the capital structure Suppose you are conducting a workshop on capital structure decisions and you want to highlight certain key issues related to capital structure. Your assistant has made a list of points for your session, but he thinks he might have made some mistakes. Review the Ilist and identify which items are correct. Check all that apply. Workshop Talking Points An increase in debt financing beyond a certain point is likely to increase the firm's cost of equity. An increase in debt financing decreases the risk of bankruptcy. An increase in the risk of bankruptcy is likely to reduce a firm's free cash flows in the future. Risks of bankruptcy increase management spending on perquisites and increase agency costs. The pretax cost of debt increases as a firm's risk of bankruptcy increases.debt can bo soon as a remedy for agency costs and -problems, and therefore create value in companies. However, in certain circumstances debt can also be responsible for aggravating agency problems, and load to value destruction in companies. Please explain and discuss this statement.Corporate finance is concerned with (i) what long-term investments the firm should choose, (in) how the firm should raise funds for selected investments, and (ili) how short-term assets should be managed and financed. option 1: True option 2: False
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