Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 18, Problem 24PS
Leverage targets Some corporations’ debt–equity targets are expressed not as a debt ratio but as a target debt rating on the firm’s outstanding bonds. What are the pros and cons of setting a target rating rather than a target ratio?
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Students have asked these similar questions
Which of the following is an advantage of debt financing?
a. Excessive debt increases the risk of equity holders and therefore depresses share price.
b. The obligation is generally fixed in terms of interest and principal payments.
c. Interest and principal obligations must be paid regardless of the economic position of the firm.
d. Debt agreements contain covenants.
Is there a readily recognisable debt-to-equity ratio that maximises a firm's value? What are your reasons for or against?
Why is EBIT generally considered to be independent of financial leverage?Why might EBIT be influenced by financial leverage at high debt levels?
Chapter 18 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Here are book and market value balance...Ch. 18 - Prob. 3PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Financial distress This question tests your...Ch. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Prob. 9PSCh. 18 - Pecking-order theory Fill in the blanks: According...
Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Suppose that Congress sets the top...Ch. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Prob. 20PSCh. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 25PSCh. 18 - Trade-off theory The trade-off theory relies on...
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- Select all that are true with respect to the cost of debt. Group of answer choices it is the return the firm needs to earn overall to satisfy all investors It is the rate the debt holders demand given the risk they face as debt holders Can be estimated using CAPM Cannot be estimated using CAPM because CAPM is used for estimating the cost of equity Is always equal to the YTM on a company's existing bonds Is lower than the YTM on a company's existing debt if there is default risk Can be proxied by the YTM on a company's existing debt if the debt is risk free Flag question: Question 7arrow_forwardWhy is EBIT generally considered independent of financial leverage? Why might EBITactually be affected by financial leverage at high debt levels?arrow_forwardCan the yield on company traded bonds can be used as an estimate for some, or all, of the company’s debt. If not, can credit spreads be obtained from a financial data provider that can be used to estimate the cost of debt?arrow_forward
- Describe the debt-to-equity ratio and explain how creditors and owners use this ratio to evaluate a company’s risk.arrow_forwardWhat impact do bond ratings have on the cost of debt to the issuing firm?arrow_forwardCalculate the projected debt ratio, debt-to-equity ratio, liabilities-to-assets ratio, times-interest-earned ratio, and EBITDA coverage ratios. How does Computron compare with the industry with respect to financial leverage? What can you conclude from these ratios?arrow_forward
- What is the impact on stockholders equity when a company uses debt financing as a source of funding?arrow_forwardThe cost of equity is _______. A. the interest associated with debt B. the rate of return required by investors to incentivize them to invest in a company C. the weighted average cost of capital D. equal to the amount of asset turnoverarrow_forwardIdentify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. a. Requires payments of both periodic interest and par value at maturity. b. Bonds require payment of par value at maturity. C. Bonds do not affect owner control. d. A company earns a lower return with borrowed funds than it pays in interest. e. A company earns a higher return with borrowed funds than it pays in interest. f. Bonds require payment of periodic interest.arrow_forward
- Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. A company earns a higher return with borrowed funds than it pays in interest.arrow_forwardFor purposes of measuring a firm’s leverage, should preferred stock be classified as debt orequity? Does it matter whether the classification is being made (a) by the firm’s management,(b) by creditors, or (c) by equity investors?arrow_forwardWhat does issuing equity instea of debt signal about the financial health of a company?arrow_forward
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