The fact that 50% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision. True False
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- One reason a company may choose to issue additional debt instead of equity when raising capital is that __________.debt interest payments are tax-deductibleIndicate whether the following statements is true or false. Provide the relevant explanations. In the presence of corporate taxes, a company would prefer to raise debt only when the benefits of the tax shield fully offset the cost of debt. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)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.
- 16. Despite the tax benefit of debt, a firm may refrain from using only debt financing, A. because a large amount of debt potentially creates significant bankruptcy costs B. because the firm only has modest operating incomes C. if stock investors do not face personal tax, but investors in firms' debt face a personal tax rate equal to the corporate tax rate. D. all of the above15. In comparison to the case when there is only corporate tax, the benefit of debt tends to when there are both corporate and personal taxes. A. remain the same B. be smaller D. be greater for risky firms but smaller for safe firms C. be greaterWhich 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 given
- Unless exceeding the permissible limit governed by tax law, interest paid by a corporation is a tax deduction for the paying corporation, but dividends are not deductible. This treatment, other things held constant, would tend to increase the use of debt financing by corporations. True FalseA corporation may choose to use debt financing because it has an income tax advantage. it typically has a higher cost of capital than equity. it carries voting rights. it reduces financial leverage.Ch. 16. Which one of the following is not a characteristic of Modigliani-Miller Propositions with corporate taxes? Group of answer choices The cost of equity rises with leverage because the risk to equity rises with leverage There are no taxes Corporations are taxed at the rate TC on earnings after interest There are no transaction or bankruptcy costs individuals and corporations borrow at the same rate
- 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 debtEXERCISE 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.)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.