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

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

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter15: Distributions To Shareholders: Dividends And Repurchases

Section: Chapter Questions

Problem 2Q: How would each of the following changes tend to affect aggregate payout ratios (that is, the average...

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Indicate 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.)
Subject. General Account
Provide this general account answer
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 above
15. 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 greater
A 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 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.
General Account Subject Answer Wanted
Cost account
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to Equity Ratio (D/S) Before-Tax Cost of Debt (ra) Market Debt-to- Value Ratio (wd) Market Equity-to- Value Ratio (ws) 0.0 1.0 0.10 0.90 0.20 0.80 0.30 0.40 0.70 0.60 0.00 0.1111 0.2500 0.4286 0.6667 6.0% 6.4 7.0 8.2 10.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 6%, the market risk premium is 7%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.7. Based on this information, what is the firm's optimal capital structure, and what would be the weighted average cost of capital at the optimal…
In a Modiqliani and Miller world with corporate taxes, companies A and B are identical except for their capital structure. While A is unlevered, D>0. Let T denote the corporate tax rate. Which of the following statement is False? A. The value of B’s equity is larger than the value of A’s equity B. The total value of B is larger than the total value of A C. The value of B’s debt is larger than the value of A’s debt D. The difference in the total value of the two companies is equal to TD