Question

1. Which of the following statements about lease financing is incorrect:

1. Lease financing increases the risk for the firm.
2. Lease financing can be considered a form of debt financing.
3. Lease financing is subordinated to equity.
4. Lease financing is typically considered a capital structure component.

2. Hybrid financing

1. lowers the WACC for the firm.
2. will result in dilution for the shareholders.
3. is more risky then equity.
4. Both A. and B. are correct.

3. What do lease financing and hybrid financing in common?

1. They both lower the WACC for the firm.
2. Properly used they both will result in higher profits for the shareholders.
3. They both are more risky then equity.
4. They have nothing in common.

4. By enrolling the Widows-and-Orphans Clientele into a DRIP a firm is able to retain some of its current shareholders.

True/False

5. Which of the following statements about flotation costs is incorrect:

1. As a company issues more equity the flotation costs, as a percentage of the capital raised, decreases.
2. Due to flotation costs on equity the WACC₂is higher than WACC₁.
3. All capital components, i.e. debt, preferred stock, retained earnings, and equity, have flotation costs.
4. Flotation costs represents a payment to investment banks for their services.

6. A stock split has no impact on the value of the firm.

True/False

Answer 1

Answer 1.the Option no.1 that lease financing increases the risk of the firm is Incorrect so lets First Understand the meaning of lease Financing

A lease can be defined as an arrangement between the lessor (owner of the asset) and the lessee (user of the asset) whereby the lessor purchases an asset for the lessee and allows him to use it in exchange for periodical payments called lease rentals or minimum lease payments.In Simple Layman Language Lease Financing is using the asset of other person in exchange of certain payments.so the Lessee (the person using the Asset ) does not need to purchase the Asset so the risk of investing in the Asset is actually reduced that is why option 1 is wrong

Reason why other Options  are Correct

• option no.2 says that lease financing is a kind of debt Financing so Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, so here Lessee has an obligation to pay lease Rentals
• Option no.3 Lease financing is subordinated to equity. it is true ,Subordinated is generally less important so Equity shareholders are important part because these are real owners of the company therefore lease financing becomes less important
• Option no.4 Lease financing is typically considered a capital structure component because it is a kind of debt which is the part of Capital Structure.

2. In this Question the option no. D is correct lets understand firstly what is hybrid financing

Hybrid Financing is the Combination of Both Debt And Equity it Carries both the characteristics of Debt And Equity which will ultimately reduce the Weighted Average Cost of capital because both Sides debt and Equity would be balanced Secondly due to this kind of Financing Shareholders will be Diluted because Debt will also be included which will increase the proportion of Creditors hence Shareholder will be Diluted

Option No. C is not Correct Because Equity Shareholders are more at risk,they generally Sink and Swim with the Company they Receive their part of profits After all other Shareholders and Creditors have Received While Hybrid Financing Are Less risky than equity because they include some proportion of Debt also.

4.By enrolling the Widows-and-Orphans Clientele into a DRIP a firm is able to retain some of its current shareholders this Statement is True because Widow-and-orphan stock refers to an equity investment that often pays a high dividend and is generally considered low risk. so an investment which have higher returns and low risk can retains the Shareholders

6.Stock split has no impact on the value of the firm.Stock Split is an issue of new shares in a company to existing shareholders in proportion to their current holdings.A stock split is a corporate action that increases the number of the corporation's outstanding shares by dividing each share, which in turn diminishes its price. The stock's market capitalization, however, remains the same, just like the value of the $200 bill does not change if it is exchanged for two $100.