Which of the following statements are incorrect regarding how much debt a company should borrow? Choose all that apply.Question 9 options:AAs long as the company can generate higher returns on its new projects than its borrowing interest rate, borrowing more debt will enhance the company's ROE.BBorrowing more debt will increase a company's distress level.CThe bigger the company, the more it should borrowDDebt is considered a more expensive capital source.

The company has two types of capital Debt capital and equity capital. Interest on Debt capital…

Answered: Which of the following statements are…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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4. Which of the following is false about the risk-shifting problem? Risk-shifting leads to a transfer of value from debt-holders to equity holders Risk-shifting leads prospective lenders to pay less for debt and require higher interest payments Risk-shifting arises when shareholders choose negative NPV projects with higher risk Risk-shifting is an example of an agency cost of debt Risk-shifting is greater in firms with low leverage
Capital rationing: Select one: O a. assures shareholder wealth maximization. O b. is a way of preserving the assets of the firm over the long term. O c. assures maximum potential profitability. O d. is a less than optimal way to arrive at capital budgeting decisions.
A Moving to another question will save this response. Question 6 According to the risk shifting (or asset substitution) hypothesis Shareholders are keen to take excessively risky projects as they do not internalize the negative externality to bondholders O Firms should never pay dividends O Companies become too conservative in their investment when debt levels are such that bankruptcy is a likely outcome O It is always optimal to reduce leverage as this reduces expected bankruptcy costs A Moving to another question will save this response. ipeg WhatsApp Image..jpeg WhatsApp Image.jpeg WhatsApp Image...jpeg WhatsApp Image..jpeg WhatsApp Im. Shot on vivo Z1x 00 16°C Mostly cloudy WIDE Vivo Al camera
If managers of a company have inside information about the company’s future performances and such inside information is unknown to outsiders, then the company’s managers are most likely to use _____ to finance its project investment Group of answer choices a. the company’s retained earnings b. debt borrowing from banks c. share issuance to new investors d. there is no difference among the above three funding options
If the present value of a firm's marginal financial distress costs are equal to the present value of its marginal tax shieid, the companySelect one:a.has too much debt in its capital structureb.should increase the amount of debt in ts capital structurec. has an optimal capital structured.shouid reduce the amount of equity in its capital structuree:none of the abovt
The optimal capital structure: Multiple Choice will be the same for all companies within the same industry. will remain constant over time unless the company changes its primary operations. will vary over time as taxes and market conditions change. places more emphasis on operations than on financing. is unaffected by changes in the financial markets.
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What effect would a decreased cost of capital have on a firm's future investments?
When a firm has less current assets to pay off its current liabilities, it has ______ liquidity risk. Such a firm is likely to have _____ returns. Question 32 options: 1) lower, higher 2) lower, lower 3) higher, higher 4) higher, lower
8. Which of the following does the trade-off theory predict? A. Bankruptcy costs mean having no debt is always optimal. B. Reducing leverage always reduces firm value. C. In the long run the firm's capital structure converges to the optimal one. D. None of the above.
If interaction effects make it difficult for a firm to adjust its capital structure based on prevailing conditions, then Group of answer choices the firm should use as much debt financing as possible when it is financially healthy in order to benefit from lower corporate taxes the firm should target a 50% debt/50% equity capital structure the firm should choose the capital structure that will minimize all transaction costs--both direct and indirect the firm should use more equity financing than is necessarily optimal today
Which of the following would reduce a firm's WACC after tax? a. A firm invests in an average-risk project using equity, rather than debt financing. b. A supermarket chain decides to establish hardware stores which increases its systematic risk. c. A firm issues shares and uses the proceeds to pay off a bank loan. d. A firm issues bonds and uses the proceeds to repurchase stock. e. A firm significantly improves its operating cost control to boost profits.

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A	As long as the company can generate higher returns on its new projects than its borrowing interest rate, borrowing more debt will enhance the company's ROE.
B	Borrowing more debt will increase a company's distress level.
C	The bigger the company, the more it should borrow
D	Debt is considered a more expensive capital source.