Which of the following are the advantages of issuing preferred stock over debt? More than one answer may be correct. Multiple select question. Preferred dividends are non-taxable, whereas interest income is taxable. Preferred shareholders cannot force a corporation into bankruptcy because of unpaid dividends. Firms issuing preferred stock can avoid the threat of bankruptcy. Unpaid preferred dividends are not debts of a corporation. Preferred dividend increases the earnings per share (EPS) of a firm, whereas interest on debt decreases the EPS of a firm.

Which of the following are the advantages of issuing preferred stock over debt? More than one answer may be correct. Multiple select question. Preferred dividends are non-taxable, whereas interest income is taxable. Preferred shareholders cannot force a corporation into bankruptcy because of unpaid dividends. Firms issuing preferred stock can avoid the threat of bankruptcy. Unpaid preferred dividends are not debts of a corporation. Preferred dividend increases the earnings per share (EPS) of a firm, whereas interest on debt decreases the EPS of a firm.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 6P

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* Your answer is incorrect. A company may repurchase its own shares for all of the following reasons, except O to reduce the number of shares issued and thereby increase earnings per share and return on equity. to have additional shares available for use in the acquisition of other companies. O to attempt to influence the market price of the shares. O to reduce the number of shares issued in order to meet debt to equity bank covenant requirements.
Which of the following statements is CORRECT? O The debt ratio that maximizes expected EPS generally exceeds the debt ratio that maximizes share price. O Increasing its use of financial leverage is one way to increase a firm's return on investors' capital (ROIC). O If a company were to issue debt and use the money to repurchase common stock, this would reduce its return on investors' capital (ROIC). O If a change in the bankruptcy code made bankruptcy less costly to corporations, this would tend to reduce corporations' debt ratios.
Which of the following statements is CORRECT? a. One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature. b. Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds. c. Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees. d. Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond. e. A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
hich of the following statements is CORRECT? a. Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation. b. The preferred stock of a given firm is generally less risky to investors than the same firm's common stock. c. Corporations cannot buy the preferred stocks of other corporations. d. Preferred dividends are not generally cumulative. e. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation. Provide an explanation for the choice
18. Which of the following statements is true? A. Payment on interest on debt is considered an expense, while payment of dividends is a return on capital. B. Unpaid common stock dividends can result in liquidation of the firm. C. One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt. 19. In the real world with the presence of corporate taxation, MM Proposition I that VL- Vu does not hold because: A. levered firms pay less taxes compared with identical unlevered firms. B. bondholders require higher rates of return compared with stockholders. C. dividends are no longer relevant with taxes. 20. AI Robotics Company will earn $120 in one year if it does well. The debtholders are promised payments of $80 in one year if the firm does well. If the firm does poorly, expected earnings in one year will be $20 and the repayment to debtholders will only be $10 because of financial distress cost. The probability of the firm…
A firm’s preferred stock often sells at yields below its bonds because:a. Preferred stock generally carries a higher agency rating.b. Owners of preferred stock have a prior claim on the firm’s earnings.c. Owners of preferred stock have a prior claim on a firm’s assets in the event of liquidation.d. Corporations owning stock may exclude from income taxes most of the dividend income they receive.
Which of the following statements is NOT correct? A firm's preference shareholders: O a. Are treated equally as all other preference shareholders. O b. Are entitled to perpetual cash flows. O C. Are entitled to a fixed dividend when there is sufficient retained earnings. O d. Vote at the firm's annual general meeting. O e. Rank ahead of ordinary shareholders in the case of bankruptcy. Which of the following statements about Depreciation is NOT correct? Oa. The book (carrying) value of a fixed asset is equal to the historical cost minus accumulated depreciation. O b. Higher depreciation has the effect of reducing Net Income but increasing Cash Flow from Assets. For tax purposes, the depreciation calculation must exclude any residual or salvage value of the asset. O d. Depreciation is subtracted from Cash Flow From Assets because it is a cash flow related to Capital expenditure e. If the depreciation method used for tax purposes is changed from diminishing value to straight line, so less…
Holding everything else constant, which of the following statements is TRUE? * If amendments to the bankruptcy code make bankruptcy less difficult for companies, the average corporation's debt ratio will likely decrease. An rise in the personal tax rate is likely to increase the average corporation's debt ratio. A rise in a company's operating leverage is likely to allow it to use more debt in its capital structure. An rise in the corporate tax rate is likely to allow a company's capital structure to incorporate more debt. Firms with relatively stable assets have relatively low bankruptcy costs, so they use relatively little debt.
How are warrants used by corporations? O To decrease the volatility of their common stock O To allow for issuance of debt at rates lower than would otherwise be required To decrease the dilution of earnings per share O More than one of the above
The disadvantages of debt to the corporation include all but which of the following? Group of answer choices A. Indenture agreements may place burdensome restrictions on the firm. B. Interest and principal payments must be met regardless of performance results. C. Debt may have to be paid back with "cheaper" dollars because of inflation. D. Too much debt may depress the firm's stock price.
Indicate whether each of the following statements is true or false. Support vour answers with relevant explanations. A) The higher the proportion of equity in a company's overall capital structure the higher return required by its debtholders.B) In the presence of corporate taxes, a company would prefer to raide debt only when the benefits of the tax shield fully offset the cost of debt. C) In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company.
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.