If a firm's marginal tax rate is increased, this means that other things held constant, lower the cost of debt used to calculate its WACC. True False
Q: According to MM propositions, which of the following statements best describes the consequence of…
A: MM proposition stands for Modigilani -Miller theorem states that the company’s market value should…
Q: All of the following are likely to result in the use of less debt in a company's capital structure…
A: A company uses two main types of funding – debt and equity. Debt refers borrowings and liabilities…
Q: The Modigliani and Miller theories are based on several unrealistic assumptions about debt…
A: The capital structure refers to the combination of debt and equity which is used in financing its…
Q: O In the case of flat-rate write-offs on receivables, the sales tax must also be corrected. O All…
A: Production cost refers to the expenses involved while producing a certain product.
Q: Under normal circumstances, the weighted average cost of capital is used as the firm's required rate…
A: The WACC is the after-tax return that the company provides to all its stakeholders for financing its…
Q: Select all that are true with respect to the adjusted present value (APV) DCF methodology. Group of…
A: Stock valuation is the process of determining the intrinsic value of a company's stock and various…
Q: Which statement about the cost of capital is incorrect? * A. If a company’s tax rate increases…
A: The weighted average cost of capital (WACC) is the sum of costs of different sources of finance…
Q: he MM model, as the proportion of debt in the capital structure increases, the cost of equity
A: Modigliani-Miller theorem is based on the value of the firm, with the assumption of no taxes,…
Q: Present value of a perpetual tax shield will go up if the firm's tax rate O decreases; decreases O…
A: When interest rate are higher and tax rates are also higher, it will be higher tax saving on debt…
Q: When one uses the after-tax weighted average cost of capital (WACC) to value a levered firm, the…
A: Introduction:- The main use of Weighted average cost of capital is to determine the cost of each…
Q: The cost of debt, rd, is normally less than rs, so rd(1-T) will normally be much less than rs.…
A: The Weighted Average Cost of Capital (WACC) is a financial metric that calculates the average cost a…
Q: 11.Explain why a firm needs to understand their allocation of debt financing to equity (the amount…
A: The major decision that a financial manager has to make while making the financing decision is to…
Q: Why do companies often prefer debt financing to other forms of financing for capital investments? a.…
A: Debt and Equity are two important sources of finance being used in business. On debt, interest…
Q: Which is a true statement Flotation cost must be considered with retained earnings Since taxes are…
A: 3. The investor's required rate of return is the firm's cost of capital: This statement is TRUE. The…
Q: Which of the following is true regarding a company assuming more debt? Select one: a. Assuming…
A: WHEN A COMPANY BORROWS MONEY TO BE PAID IN FUTURE WITH INTEREST IT IS KNOWN AS DEBT . MORE OF DEBT…
Q: Why can an M&A fail? O a. Economies of scale O b. shortcomings of the due diligence process,…
A: In general terms merger and acquisition refers to the consolidation of assets of 2 or more entities.…
Q: Why should financial decision makers obtain a good estimate of a firm’s cost of capital? What are…
A: The cost of capital is the cost of using the funds in the business. The funds may be in form of debt…
Q: How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its…
A: Overview: Weighted average cost of capital (WACC) : Weighted average cost of capital is the mean…
Q: Regarding the trade-off theory, a firm would reach its optimal capital structure if the tax savings…
A: Capital Structure is the break-up of total amount of funds raised by entity to finance its…
Q: Which of the following statements is not correct? The higher the sales growth rate g is, the…
A: Additional fund needed is the amount of money a company needs to raise from its external sources to…
Q: 6. Which of the below statements are false about the static trade-off theory? * Companies with…
A: Which of the below statements are false about the static trade-off theory? * Companies with higher…
Q: In determining the optimal weighted average cost of capital, an MNC can never have too much debt.…
A: The Weighted Average Cost of Capital is always post tax. It is calculated with the help of following…
Q: Bolton Company substantially increased its allowance for bad debt. Which of the following effects…
A: The current ratio measures capabilities of the company to meet-out short-term obligations or not. it…
Q: pany borrows, the higher will be its tax shields, therefore a company will always prefer to issue…
A: WACC is weighted average cost of capital after tax.
Q: If the corporate income tax rate were to increase, then the use of debt will become more desirable…
A: Capital structure can be defined as the mixture of different capital sources. Capital sources can be…
Q: For a typical firm, assumes that all rates are after taxes and that the firm operates at its target…
A: Given, cost of equity > after tax cost of debt > WACC.
Q: Which of the following is a valid reason for a firm not to use as much debt as it can raise? Group…
A: The use of more debt results in an increase in the firm's cost of capital as the proportion of…
Q: Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm…
A: Modigliani and Miller's approach (M&M) states that the valuation of a firm is independent of the…
Q: According to theory, the value of a firm is maximized by: Issuing no debt Issuing the maximum amount…
A: The value of a corporation is the total market value of the corporation which reflects the claims by…
Q: 4. Other things held constant, the more debt a firm uses, the lower its profit margin will be.
A: A ratio that helps to evaluate how much portions of the sales revenue of a company turns in the…
Q: Consider the effect that corporate profit taxes have on investing. Look back at Figure 15.4. Suppose…
A: If corporate taxes are imposed on firm this will reduce the after-tax effect at each and every level…
Q: he weighted average cost of capital for a firm: Ois equivalent to the after-tax cost of the firm's…
A: WACC of the company is the cost of capital of the company and is minimum required of the company.
Q: Why does the WACC decrease as a firm begins to take on debt and then increase after a certain point?
A: WACC: It is also known as Weighted Average Cost of Capital. It is the mixture of weighted cost of…
Q: Why is it important to include the tax effect into cost of capital computations for firms with debt…
A: In case of debt financing company Cost of debt we take for computation of weighted average cost of…
Q: The interest tax shield adds value to a levered (part debt part equity) firm. A True B False
A: The objective of the question is to determine whether the interest tax shield adds value to a…
Q: Why do the companies in high tax brackets incur lower after-tax interest costs by financing through…
A: Debts are the liability issued by the company to raise funds. The debt holder receives fixed…
Q: key benefits associated with refunding debt are the reduction in the firm's debt ratio and the…
A: The debt ratio is ratio that dictates that how much company has taken the debt out of its total…
Q: Which of the following statements is most accurate? A. Financial leverage is directly…
A: Operating leverage refers to the degree to which a company's operating income or earnings before…
Q: How does the WACC DCF methodology mechanically incorporate interest tax shields (select the best…
A: The correct answer is "By estimating a discount rate that incorporates the tax benefits of debt."In…
Q: Which of the following is a disadvantage of long-term debt as a means of company financing? Group…
A: Funds are very important and necessary for smooth running of a business organization. A business has…
Q: According to MM propositions, at what debt-equity ratio should the cost of equity be the lowest?…
A: Debt equity ratio is one of the important ratio in business. This shows ratio between debt and…
Q: Which of the following makes this a true statement? In this slightly more realistic world with…
A: We derive a firm's value by discounting its future cash flows. We use weighted average cost of…
Q: a. There are tax benefits to debt, so capital structure can affect the value of the firm b. Firms…
A: The correct answer to the first question is (a) There are tax benefits to debt, so capital structure…
Q: According to the capital structure trade-off model: O a. The optimal capital structure minimizes the…
A: Capital structure refers to the mix of source from where the long term funds required in a business…
Q: Suppose that a new government is elected and it changes the law applying to firms to: • Allow…
A: The trade-off theory of capital structure proposes that a corporation balances costs and advantages…
Q: The higher the debt-to-equity ratio, the less debt a company is using co finance its assets. O True…
A: Debt to equity ratio is an important leverage ratio that we use in the world of accounting and…
Q: There are advantages and disadvantages of debt financing in contrast to equity financing. Which of…
A: Debt financing has less risk as compared to equity financing, which is why the cost of debt is less…
If a firm's marginal tax rate is increased, this means that other things held constant, lower the cost of debt used to calculate its WACC.
- True
- False
![](/static/compass_v2/shared-icons/check-mark.png)
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
- The higher the firm's tax rate, the lower the firm's after-tax cost of debt and WACC will be (other things held constant.) TRUE Or False?According to the trade-off theory, the optimal capital structure is the level of debt that O minimizes the financial distress costs. equates the present values of the incremental interest tax shield and the incremental financial distress costs. maximizes the after-tax cash flows that are internally generated. maximizes the present value of the interest tax shield.If the firm borrows money at a significantly lower rate, this factor affects the firm's MARR. How?
- WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT? A. IF A FIRM'S EXPECTED BASIC EARNING POWER (BEP) IS CONSTANT FOR ALL ITS ASSETS AND EXCEES INTEREST RATE ON ITS DEBT, THEN ADDING ASSETS FINANCING THEM WITH DEBT WILL RAISE THE FIRM'S EXPECTED RATE OF RETURN ON COMMON EQUITY (ROE)? B. THE HIGHER ITS TAX RATE, THE LOWER A FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. C. THE HIGHER THE INTEREST RATE ON ITS DEBT, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. D. THE HIGHER ITS DEBT RATIO, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. E. STATEMENT A IS FALSE, BUT B, C AND D ARE ALL TRUE.Which of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.Assume that there is corporate tax, but no other frictions. Based on the propositions of Modigliani and Miller, which statement is the least accurate? Oa. The weighted cost of capital decreases as the leverage ratio increases. D. The cost of debt increases as the leverage ratio increases. C. Firm value increases as the firm takes on more debts. d. The cost of equity increases as the leverage ratio increases. O e. The optimal structure is 100% debt.
- Regarding the trade-off theory, a firm would reach its optimal capital structure if the tax savings from additional leverage are offset by the increased costs of distress. the present value of the tax shield exceeds the value of the all-equity-financed firm. additional borrowing results in lower financial distress costs. additional borrowing is offset by the interest tax shield.How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratio 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratio
- How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio. a. True b. False
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Foundations Of Finance](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
![Corporate Finance (The Mcgraw-hill/Irwin Series i…](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Foundations Of Finance](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
![Corporate Finance (The Mcgraw-hill/Irwin Series i…](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)