Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Question
Chapter 16, Problem 27P
Summary Introduction
To determine: The costs for the given situations.
Introduction:
Cost includes both indirect cost and direct cost that are imposed on the investors and firm, in case of bankruptcy, it imposes both direct and indirect cost. This assumption is ignored in a perfect capital market.
A cost of debt is an effective rate a company pays on its present debt. Cost of debt is measured before taking taxes into account.
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Students have asked these similar questions
Critically discuss over-investment and under-investment problems due
to debt usage. What kinds of capital structures could prevent such
problems?
Which of the following is incorrect about debt financing?
A. Debt financing always generates excess returns which benefits equity investors
b. One benefit of debt financing is that interest on most debt is fixed
c. One benefit of debt financing is that interest is a tax deductible expense
d. It increases financial leverage
If debt creates additional expense without enough benefit through cost savings, income or capital gain, then it is not worth it.
True or False?
Chapter 16 Solutions
Corporate Finance
Ch. 16.1 - Prob. 1CCCh. 16.1 - Does the risk of default reduce the value of the...Ch. 16.2 - If a firm files for bankruptcy under Chapter 11 of...Ch. 16.2 - Why are the losses of debt holders whose claims...Ch. 16.3 - Prob. 1CCCh. 16.3 - True or False: If bankruptcy costs are only...Ch. 16.4 - Prob. 1CCCh. 16.4 - According to the trade-off theory, all else being...Ch. 16.5 - Prob. 1CCCh. 16.5 - Why would debt holders desire covenants that...
Ch. 16.6 - Prob. 1CCCh. 16.6 - Prob. 2CCCh. 16.7 - Prob. 1CCCh. 16.7 - Prob. 2CCCh. 16.8 - How does asymmetric information explain the...Ch. 16.8 - Prob. 2CCCh. 16.9 - Prob. 1CCCh. 16.9 - Prob. 2CCCh. 16 - Gladstone Corporation is about to launch a new...Ch. 16 - Baruk Industries has no cash and a debt obligation...Ch. 16 - When a firm defaults on its debt, debt holders...Ch. 16 - Prob. 4PCh. 16 - Prob. 5PCh. 16 - Suppose Tefco Corp. has a value of 100 million if...Ch. 16 - You have received two job offers. Firm A offers to...Ch. 16 - As in Problem 1, Gladstone Corporation is about to...Ch. 16 - Kohwe Corporation plans to issue equity to raise...Ch. 16 - Prob. 10PCh. 16 - Prob. 11PCh. 16 - Hawar International is a shipping firm with a...Ch. 16 - Your firm is considering issuing one-year debt,...Ch. 16 - Marpor Industries has no debt and expects to...Ch. 16 - Real estate purchases are often financed with at...Ch. 16 - On May 14, 2008, General Motors paid a dividend of...Ch. 16 - Prob. 17PCh. 16 - Consider a firm whose only asset is a plot of...Ch. 16 - Prob. 19PCh. 16 - Prob. 20PCh. 16 - Prob. 21PCh. 16 - Consider the setting of Problem 21 , and suppose...Ch. 16 - Consider the setting of Problems 21 and 22, and...Ch. 16 - You own your own firm, and you want to raise 30...Ch. 16 - Empire Industries forecasts net income this coming...Ch. 16 - Ralston Enterprises has assets that will have a...Ch. 16 - Prob. 27PCh. 16 - If it is managed efficiently, Remel Inc. will have...Ch. 16 - Which of the following industries have low optimal...Ch. 16 - According to the managerial entrenchment theory,...Ch. 16 - Info Systems Technology (IST) manufactures...Ch. 16 - Prob. 32PCh. 16 - Prob. 33P
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Similar questions
- 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.arrow_forward1. 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.arrow_forwardWhy do we use an after-tax figure for the cost of debt but not for the cost of equity? Explain yourreasoning and show your workings.arrow_forward
- What are the two best arguments favor debt reduction (i.e., the pros)?arrow_forwardWhich of the following might discourage covered interest arbitrage even if interest rate parity does not exist? A. transaction costs. B. political risk. C. differential tax laws. D. all of the above. E. none of the above.arrow_forwardWhat is the main purpose of loan loss provisioning? Explain the concepts of incurred loss model and dynamic loan loss provisioning. What are the problems with the incurred loss model and how does the dynamic loan loss provisioning tries to address those problems?arrow_forward
- Explain Negative Amortization Loans with example?arrow_forwardThere are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing? a. The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest b. The repayment of debt capital may affect the liquidity of the company c. If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets d. The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares e. Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the companyarrow_forwardDebt financing is typically less expensive than equity financing and is often easier to obtain. Is this true? Explain.arrow_forward
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