If the after-tax cost of debt is less than the cost of equity in a fırm, which of the following relationships must be true? Assume this firm has no preferred stock. (Multiple Choice) WACC = After-Tax Cost of Debt < Cost of Equity After-Tax Cost of Debt < WACC < Cost of Equity After-Tax Cost of Debt < Cost of Equity < WACC After-Tax Cost of Debt < Cost of Equity = WACC WACC < After-Tax Cost of Debt < Cost of Equity

If the after-tax cost of debt is less than the cost of equity in a fırm, which of the following relationships must be true? Assume this firm has no preferred stock. (Multiple Choice) WACC = After-Tax Cost of Debt < Cost of Equity After-Tax Cost of Debt < WACC < Cost of Equity After-Tax Cost of Debt < Cost of Equity < WACC After-Tax Cost of Debt < Cost of Equity = WACC WACC < After-Tax Cost of Debt < Cost of Equity

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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Which of the followings proposes that there is a tradeoff between level of borrowing and benefit of tax shields up a point after which financial distress costs start kicking in? CAPM Static capital structure theory M&M Proposition I M&M Proposition II Pecking order theory Floation cost includes Gross spread Direct expenses Indirect expenses Abnormal returns All of above Which one of the followings states that the value of a firm is unrelated to the firm's capital structure? Capital Asset Pricing Model M&M Proposition I M&M Proposition II Law of One Price Efficient Markets Hypothesis
Which statement is most correct? * A. Since debt financing raises the firm’s financial risk, increasing debt ratio will increase WACC. B. Since debt financing is cheaper than equity financing, increasing debt ratio will reduce WACC. C. Increasing a firm’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the firm’s WACC. D. Statements a and c are correct. E. None of the above
Which of the following will increase the WACC for a tax-paying company? Decrease the proportion of equity financing Decrease the proportion of debt financing Decrease the market value of the equity Increase the market value of the debt
While the use of debt can lower the average cost of capital, there is a point that the debt leverage gets high enough it increases the cost of capital. Group of answer choices True False
Ch. 17. True/False. The optimal amount of debt produces the highest weighted average cost of capital. Group of answer choices True False
Generally speaking, the cost of debt is cheaper than the cost of equity. Does it imply that a firm should increase its debt-to-equity ratio to as high as possible such that its corporate cost of capital can be minimized?
The financial manager of a firm determines the following schedules of cost of debt and cost of equity for various combinations of debt financing: Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 4 % 8 % 10 4 8 20 4 8 30 5 9 40 6 10 50 8 12 60 10 14 70 12 16 Find the optimal capital structure (that is, optimal combination of debt and equity financing). Round your answers for the capital structure to the nearest whole number and for the cost of capital to one decimal place. The optimal capital structure: % debt and % equity with a cost of capital of % Why does the cost of capital initially decline as the firm substitutes debt for equity financing? The cost of capital initially declines because the firm cost of debt is than the cost of equity. Why will the cost of funds eventually rise as the firm becomes more financially leveraged? As the firm becomes more financially leveraged and riskier, the cost of…
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

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