General Account Subject Answer Wanted Which of the following is an advantage of debt financing?a) Interest charges on debt is very minimal.b) Interest charges on debt are tax deductible.c) Interest charges on debt are based on the net income of thefirm.d) The higher the interest charges, the lower the bankruptcycosts.e) Firms that are entirely debt financed have to pay veryminimal taxes.

a) Incorrect: Interest charges on debt can vary significantly and are not always minimal.b) Correct:…

Answered: Which of the following is an advantage…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter6: Accounting Quality

Section: Chapter Questions

Problem 4QE

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Which of the following is not a reason for the issuance of long-term liabilities? Debt financing dilutes ownership interest. Debt may be the only available source of funds. Debt financing may have a lower cost. Debt financing offers an income tax advantage.
1. Which of the following is not a reason for the issuance of long-term liabilities? a. Debt financing offers an income tax advantage.b. Ownership interest is diluted.c. Debt may be the only available source of funds.d. Debt financing may have a lower cost.
The after-tax cost of debt is generally cheaper than other sources of financing. True False
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 given
Why do companies often prefer debt financing to other forms of financing for capitalinvestments?a. Actually, they don't prefer debt financing. They usually try to use retainedearnings for capital investments.b. Because bond holders are happy to just break even on their bonds.c. Because the MARR all but guarantees the projects will return yields greater thanthe interest on the loans.d. Because debt interest is tax deductible, reducing significantly the actual cost ofborrowing money for projects.
Which of the following statements regarding the private debt market is FALSE? A) Private debt has the advantage that it avoids the cost of registration. B) Bank loans are an example of private debt—debt that is not publicly traded. C) Private debt has the disadvantage of being illiquid. D) The public debt market is larger than the private debt market.
One reason a company may choose to issue additional debt instead of equity when raising capital is that __________.debt interest payments are tax-deductible
Ques) Explain the contention that in the absence of the tax advantages of debt the use of gearing can increase the expected rate of return for shareholders, but not necessarily increase the value of their investment
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
Which of the following statements is NOT true? A. Debt contracts tend to impose more restrictions on the actions of the borrower than the lender B. Larger corporations have easier access to the securities market C. The financial sector is one of the least regulated industries in the US economy D. Collateral is used to secure debt contracts
True/False and Explain: Josephine says that firms which obtain debt financing by posting collateral, face a lower cost of debt than firms that try to obtain debt without posting collateral.
Many types of debt including auto loans, student loans and credit debt are securitized. The practice of securitization helps provide extra funding to those markets and reduces the risk of lending by pooling the debt. a) true b) false

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