Answered: If the corporate income tax rate were…

If the corporate income tax rate were to increase, then the use of debt will become more desirable in terms of increasing ROE. (All else equal.) a - True b - False

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter1: Federal Income Taxation—an Overview

Section: Chapter Questions

Problem 38DQ: LO7 Evaluate the following statement: The goal of good tax planning is to pay the minimum amount of...

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Q ) If the corporate income tax rate were to increase, then the use of debt will become more desirable in terms of increasing ROE. (All else equal.)

a - True

b - False

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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
3
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
EXERCISE AIndicate whether each of the following statements is true or false. Support your answerswith the relevant explanations.A. In the presence of corporate taxes, a company would prefer to raise debt onlywhen the benefits of the tax shield fully offset the cost of debt. (Explain yourreasoning – in your explanation, provide a numerical example supporting youranswer.)
Holding other factors constant, an increase in the tax rate on revenue generated by capital will: Group of answer choices not affect investment. increase business expenditure. decrease investment. increase investment.
While computing the cost of equity using the formula, r = D1 +g, we do not make PO any adjustment to express the cost of equity on an after-tax basis whereas while computing the cost of debt, a tax adjustment is required to arrive at after-tax cost of debt. Why is this so? Explain briefly.
How does the WACC DCF methodology mechanically incorporate interest tax shields (select the best answer)? Group of answer choices By estimating free cash flows that incorporate the tax benefits of debt. By adding the tax benefits of interest payments to the value of the firm. By adding the PV of the interest tax shields to the value of the firm. By estimating a discount rate that incorporates the tax benefits of debt.
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.
Which of the following is incorrect about debt financing? A. Debt financing always generates excess returns which benefits equity investors b. One benefit of debt financing is that interest on most debt is fixed c. One benefit of debt financing is that interest is a tax deductible expense d. It increases financial leverage
The optimal capital structure: a. Maximizes the value of equity but not the tax shield associated with debtb. Minimizes the tax shield associated with debtc. Maximizes the value of the company but not necessarily the tax shield associated with debtd. Maximizes the value of the company and the tax shield associated with debt
Which statement about the cost of capital is incorrect? * A. If a company’s tax rate increases then, all else equal, its WACC will increase. B. A company’s target capital structure affects its WACC. C. WACC calculations is based on the after-tax costs of all individual capital components. D. Flotation costs can increase the WACC.