Which of the following statements are incorrect regarding how much debt a company should borrow? Choose all that apply. Question 9 options: 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.

Which of the following statements are incorrect regarding how much debt a company should borrow? Choose all that apply. Question 9 options: 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.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 11P: WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital...

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8. Which of the following statements is FALSE? When a firm faces financial distress, it may choose not to finance new, positive-NPV projects. An under-investment problem occurs when shareholders choose to not invest in a positive-NPV project. Agency costs represent another cost of increasing the firm's leverage that will affect the firm's optimal capital structure choice. The agency costs of debt can arise only if there is no chance the firm will default and impose losses on its debt holders.
Consider a project with a HIGH beta. If you use the WACC as the discount rate for this project, you would be more likely to the NPV of the project. overestimate; overestimate O overestimate; underestimate O underestimate; underestimate O underestimate; overestimate Question 9 Assume taxes and bankruptcy costs exist, which of the following is TRUE? 1. The WACC depends on the capital structure. II. According to the pecking order, a firm should use equity financing first. OI and II O Neither I nor II Oll only OI only the risk and
If a firm uses its weighted average cost of capital (WACC) as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects. II. accept some negative net present value projects. III. favor low risk projects over high risk projects. IV. increase its overall level of risk over time. Group of answer choices I and III only III and IV only I, II, and III only I, II, and IV only I, II, III, and IV
Which of the following statements is true? Group of answer choices a. Undertaking a negative NPV project may increase the value of a firmʹs equity while decreasing overall firm value b. In order to maximize firm value, management should commit to take on no projects that could decrease the value of the existing debt c. In order to maximize firm value, management should undertake all projects that will maximize the value of its equity d. Undertaking a positive NPV project will always increase the values of both the firmʹs debt and its equity
WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company’s projects tends to vary a great deal from project to project. If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will increase in value. The firm’s overall risk level will increase. The firm could potentially reject projects that provide a higher rate of return than the company should require. When a project involves an entirely new product line, the firm may be able to obtain betas from to calculate a weighted average cost of capital (WACC) for its new product line. Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of…
Please answer with reason for all why the option is correct and why the other options are incorrectPlease answer correct otherwise skip it Which of the following strategies should improve the company's ROE? Check all that apply. MULTIPLE ANSWERS A. Increase the firm's bottom-line profitability for the same volume of sales, which will increase the company's net profit margin. B. Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin. C. Increase the cost and amount of assets necessary to generate each dollar of sales because it will increase the company's total assets turnover. D. Reduce the company's operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will increase the company's net profit margin.
According to the M&M propositions, in a perfect market which of the following statements is true? a.The value of the firm will be equal to the net present value of its underlying projects b.The value of the firm is higher when financed with debt due to its lower cost c.The net present value of a firmʹs projects should exceed the present value of the firmʹs issued claims d.The net present value of a firmʹs projects will be higher if they are financed with debt since debt carries a lower cost
WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company's projects tends to vary a great deal from project to project. If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will become more valuable. The firm's overall risk level will increase. The firm could potentially reject projects that provide a higher rate of return than the company requires. Generally, a positive correlation exists between a project's returns and the returns on the firm's other assets. If this correlation is risk will be a good proxy for within-firm risk. Consider the case of another company: □ Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVS of $200,000. Management conducted a…
The market for capital Firms require capital to invest in productive opportunities. The best firms with the most profitable opportunities can attract capital away from inefficient firms with less profitable opportunities. Investors supply firms with capital at a cost called the interest rate. The interest rate that investors require is determined by several factors, including the availability of production opportunities, the time preference for current consumption, risk, and inflation. Suppose the Federal Reserve (the Fed) decides to tighten credit by contracting the money supply. Use the following graph by moving the black X to show what happens to the equilibrium level of borrowing and the new equilibrium interest rate. Q1. Which tend to be more volatile, short- or long-term interest rates? Long-term interest rates 2. Short-term interest rates Q2. If the inflation rate was 3.20% and the nominal interest rate was 4.20% over the last year, what was the real rate of interest over…
Suppose you believe that the economy is just entering a recession. Your firm must raise capital immediately, and debt will be used. Should you borrow on a long-term or short-term basis? Why?
If an investment project has a negative net present value (NPV), which one of the following statements about the internal rate of return (IRRT) of this project must be true? Select the correct response: The IRR is negative. The IRR is less than the company's weighted average cost of capital. The IRR is equal to zero. The IRR is greater than the company's weighted average cost of capital.
For each of the four questions below, identify whether the statement made in each question is correct or not and provide explanations. (b) When it comes to determining whether to take a project, the firm needs to calculate the NPV and assess the risk of it. For a highly leveraged firm, if the NPV is negative and the project is very risky, taking it is not beneficial for the firm. More specifically, the equity and debt holders will lose money because the overall firm value is highly likely decreased by that NPV.

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bartleby, a Learneo, Inc. business

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.