Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 15.1, Problem 1CC

With corporate income taxes, explain why a firm’s value can be higher with leverage even though its earnings are lower.

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Which of the following can be the effect of leverage on the WACC if corporate taxes are considered? Increased leverage will decrease the WACC. An increase in leverage will be offset by a decrease in equity financing, thus leaving WACC unchanged. Increased leverage will increase the WACC. Changes in leverage will affect the WACC only if the interest rate on debt changes.
Which of the following statements is most accurate?   A.   Financial leverage is directly related to operating leverage.   B.   Increasing the corporate tax rate will not affect capital structure decisions.   C.   A firm with low operating leverage has a small proportion of its total costs in fixed costs.   D.   Total costs can be calculated as net income minus total revenue.
The higher the firm's tax rate, the lower the firm's after-tax cost of debt and WACC will be (other things held constant.) TRUE Or False?

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Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book

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