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: Which one of the following is not a characteristic of Modigliani-Miller Propositions with corporate…
A: MM proposition with tax: if tax is allowed, the firm increases its value with introducing debt…
Q: debt financing.
A: Debt financing refers to the amount which is raised by the company after selling the debt…
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: 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: Why is the after tax cost of debt rather than the before tax cost used to calculate the weighted…
A: Weighted average cost of capital : WACC or Weighted average cost of capital, as the name suggests,…
Q: It has been suggested that in a world with only corporate taxation the value of the firm = the value…
A: Capital structure of a firm signifies the mix of equity and debt used for financing the business.…
Q: If you take corporate taxes and the cost of financial distress are into consideration, the market…
A: The cost of conducting business that a company in financial crisis faces, such as a greater cost of…
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: When comparing levered vs unlevered Capital structures why does leverage work to increase FPS for…
A: There can be two types of firms based on their capital structure. The firm which is completely…
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 are true about debt and equity interest payments are generally tax deductible…
A: Debt refers to borrowed money that must be repaid over time, typically with interest. In this form…
Q: Identify the following as either an advantage or a disadvantage of bond financing for a company. a.…
A: Bonds are debt instruments issued by companies to raise funds.The company that issues the bonds…
Q: Critique this statement: “The use of debt financing lowers the net income of the firm, and hence…
A: The statement has two parts:The use of debt financing lowers the net income of the firm,Hence debt…
Q: Please explain one advantage and one disadvantage of financing a company with debt. Advantage…
A: Advantage: Tax BenefitsOne significant advantage of financing a company with debt is the potential…
Q: The weighted average cost of capital provides the rate of return such that All capital providers…
A: To invest in new project or investment, firm require new funds which will be arranged by different…
Q: FASB allows debt to be shown at its fair market value. Consequently, if a company in financial…
A: Financial Accounting Standards Board (FASB) The FASB, located in Norwalk, Connecticut, is an…
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: it typically has a higher cost of capital than equity. it carries voting rights.
A: Debt financing occurs when a company raises capital by selling debt instruments to investors. The…
Q: If we drop the assumption that there are no information and transaction costs, in addition to…
A: As per Modigliani and Miller model, capital structure is relevant in valuing a company when there is…
Q: Identify the following as either an advantage or a disadvantage of bond financing for a company.
A: A bond is a debt security or financial instrument that represents a loan made by an investor to a…
Q: Regarding the trade-off theory, capital structure is a trade-off between: O tangible and intangible…
A: The capital structure refers to the mix of various available sources of capital which is used by a…
Q: Which of the following statements is not correct? Group of answer choices A)Purchasing fixed assets…
A: A)Purchasing fixed assets using cash decreases the current ratio. Purchasing fixed asset using cash…
Q: There are two significant benefits of obtaining a loan over investing capital: Select one: a. banks…
A: Loan is defined as the funds, which used to be given to some other party in an exchange regarding…
Q: Which of the following statements is correct? a. As Modigliani and Miller made clear in their…
A: The capital structure indicated an appropriate mixture of equity and debts in the company where the…
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: Select all that is not true about capital structure theory (MM theory). (2 answers) Under…
A: As per MM hypothesis 1, there are no corporate taxes. This hypothesis states that the level of debt…
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: True or False: When a company borrows money to finance the purchase of an asset to use in its…
A: Every organization's wants to achieve that much earing so that they can save amount after paying its…
Q: 15. In comparison to the case when there is only corporate tax, the benefit of debt tend when there…
A: Tax should be deducted from the earnings to get the net earnings. When personal tax is applied along…
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: Do you believe that the cash flows from the sale of an investment should also include the tax effect…
A: Cash Flows in any entity's books reflect the inflow and outflow of cash during a specified period
Q: 16. Despite the tax benefit of debt, a firm may refrain from using only debt financing, A. because a…
A: The correct answer to the question is option A. With increase in debt, the bankruptcy cost also…
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: When we take taxes into account, MM's 1958 Proposition could no longer hold, and the capital…
A: M&M theory states that the capital structure of a company does not have affect in its overall…
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 an advantage of a company using equity rather than debt to finance a…
A: Capital structure consist of debt and equity. Optimum capital structure gives maximum share price.
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: Why is the after-tax cost of debt, rather than its before-taxrequired rate of return, used to…
A: The mix of equity and debt is a business organization is known as the capital structure of the…
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…
Ques) Explain the contention that in the absence of the tax advantages of debt the use of gearing can increase the expected
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- Under the trade-off theory, lowering the corporate tax rate will incentivize companies to increase the ratio of debt in their capital structure. Question options: a) True b) FalseWhich of the following contentions concerning the static trade off theory of capital structure are true? (i) The optimal capital structure depends upon both the value of the tax shield and on the costs of financial distress. (ii) Costs of financial distress decrease as the amount of debt in the capital structure increases. (iii) The value of the tax shield increases as the amount of debt in the capital structure decreases. (iv) The cost of financial distress does not depend upon the nature of the firm's assets. O Only (i) and (iv) are true. O Only (iv) is true. O Only (i) is true. None are true. O Only (ii) and (iii) are true.(a) – Explain the concept of Tax Deduction in WACC. Does this tax deduction make debt finance Cheaper Then Equity Finance? (b) – Compare Dividend Valuation Model with Capital Asset Pricing Model in the context of calculating cost of equity? Can use of these two methods result in differing values of business?
- When one uses the after-tax weighted average cost of capital (WACC) to value a levered firm, the interest tax shield is: Multiple Choice A) capitalized by the levered cost of equity. B) not accounted for by the use of the WACC. C) automatically considered because the after-tax cost of debt is included within the WACC formula. D) considered by deducting the interest payment from the cash flows.Why is it important to include the tax effect into cost of capital computations for firms with debt financing? Multiple Choice taxable income is reduced by the amount of the interest expense. taxes are paid on interest but not on dividends. firms pay taxes on the outstanding principal amount of the debt. comparisons with equity financing would otherwise not be possible.There are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing? a. The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest b. The repayment of debt capital may affect the liquidity of the company c. If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets d. The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares e. Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the company
- Why does issuing debt result in an income tax advantage when compared to issuing equity?Which is not a benefit of debt to the corporation?a. interest payments are tax deductibleb. when debt is used heavily, it increases stock valuec. In periods of inflation, debt is paid back with amounts that are worth less than the ones borrowed.d. compared to equity, debts have a lower cost of capitale. answer not givenWhich 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
- 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.Which of the following is CORRECT? Select one: a. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. b. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. c. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of common stock as measured by the CAPM. d. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC. e. All of the above are correct. Which of the following is CORRECT? Select one: a. If the NPV of a project is negative, the IRR for the project must also be negative. b. A project's MIRR can never exceed its IRR. c. If a project with normal cash flows has an IRR less than WACC, the project must have a positive NPV. d. If Project 1's IRR exceeds Project 2's IRR, then 1 must…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.
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