Homemade leverage is employed when a(n)............. : A)corporation uses debt to pay dividends to sharcholders. B)corporation uses debt exclusivcly to fund a corporate expansion project. C)investor uses debt to change ihls or her ckposure to financial loverage firm increases its level of debt. D)firm cinoloys any amount of debe in its capital

Homemade leverage is employed when a(n)............. : A)corporation uses debt to pay dividends to sharcholders. B)corporation uses debt exclusivcly to fund a corporate expansion project. C)investor uses debt to change ihls or her ckposure to financial loverage firm increases its level of debt. D)firm cinoloys any amount of debe in its capital

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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In general, debt financing is _______ than equity financing. A firm’s ______ has priority in claiming the company’s assets. Question 17 options: 1) less costly, shareholders 2) less costly, lender 3) more costly, shareholders 4) more costly, lender
the effects of increasing the amount paid upfront when corporations make capital purchases with a focus on the benefits and the drawbacks.
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
When a corporation invests borrowed money in assets that generate profits greater than the after-tax cost of the debt, it increases the return on equity for common shareholders. creates financial leverage. has a mix of debt and equity in its capital structure. does all of these options. If the effective rate of interest is greater than the contract rate, the bonds will sell at par. a premium. a discount. any of these choices, depending on other circumstances.
Which of the following would reduce a firm's WACC after tax? a. A firm invests in an average-risk project using equity, rather than debt financing. b. A supermarket chain decides to establish hardware stores which increases its systematic risk. c. A firm issues shares and uses the proceeds to pay off a bank loan. d. A firm issues bonds and uses the proceeds to repurchase stock. e. A firm significantly improves its operating cost control to boost profits.
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
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.
1. Assume that capital markets are perfect: there are no transactions costs or taxes, no bankruptcy costs, individuals can borrow and lend at the same rate as corporations can, and all agents in the economy have the same information. Let us compare two corporations that are identical except that one is all equity financed and the other is part equity and part debt financed. Denote the value of the unlevered (all equity) firm by VU and the value of the levered firm by VL. Assume that • Vu = $20,000 • Interest rate on the firm's debt is .10 • The firms generate identical net revenues of $2000 in good times $500 in bad times • Levered firm has $5,000 of debt A. Compute the cash flows accruing to an investor who borrows on her personal account an amount equal to one percent of the debt of the levered firm and purchases one percent of the unlevered firm. B. Next compute the cash flows of an investor who purchases one percent of the equity of the levered firm. C. Using your results in parts…
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?
Capital Structure involves, among other things, the amount of debt and equity a company holds. Once again, given the current economic environment, what is an appropriate amount of debt (leverage) that some companies have or should have these days with all the uncertainty surrounding the markets and economy? what is an example of a company experiencing such leverage issues;
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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