Homework Answers
The true statement is:-
C) Adding debt to the capital structure will always make shareholders worse off,
This is because a larger portion of profits will tend to go to interest payments which will leave fewer earnings for shareholders.
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24) Which of the statements below is TRUE regarding CAPITAL STRUCTURE? A) Capital structure deals with...
Which of the following statements regarding a firm's optimal capital structure are true? Check all that...
Which of the following statements regarding a firm's optimal capital structure are true? Check all that apply The optimal capital structure maximizes the firm's EPS The optimal capital structure minimizes the firm's cost of debt. The optimal capital structure minimizes the firm's cost of equity. The optimal capital structure minimizes the firm's WACC. The optimal capital structure maximizes the firm's stock price.
Which of the following statements is false in a Modigliani-Miller world? A. Capital structure does not...
Which of the following statements is false in a Modigliani-Miller world? A. Capital structure does not affect the cost of capital B. Higher leverage increase the cost of equity C. Higher leverage does not affect the WACC D. Higher leverage does not affect the cost of equity Which of the following is not an advantage of having large shareholders? A. Better coordination in monitoring management B. Executives more likely to be dismissed when underperforming C. Less shareholders' interference in the...
8. More on capital structure theory The Modigliani and Miller theories are based on several unrealistic...
8. More on capital structure theory The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other factors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capital structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? Firms with a higher proportion of...
Yellowstone believes in the tradeoff theory of capital structure. This implies a) that the firm is...
Yellowstone believes in the tradeoff theory of capital structure. This implies a) that the firm is trading off its debt and its equity perfectly. b) that the firm has an optimal capital structure c) that the present value of the financial distress costs offset the present value of homemade leverage costs. d) that the firm does not have an optimal capital structure e) that the NPV of the firm is zero.
The trade-off theory relies on the threat of financial distress. But why should a public corporation...
The trade-off theory relies on the threat of financial distress.
But why should a public corporation ever have to land in financial
distress? According to the theory, the firm should operate at the
top of the curve in Figure 1. Of course, market movements or
business setbacks could bump it up to a higher debt ratio and put
it on the declining, right-hand side of the curve. But in that
case, why doesn't the firm just issue equity, retire debt,...
Consider the following current capital structure and two potential variations to the capital structure for KLM...
Consider the following current capital structure and two potential variations to the capital structure for KLM Corporation: Current Financial Mix 1 Financial mix 2 Proportion of debt 50% 40% 60% Proportion of equity 50% 60% 40% Pre-Tax cost of debt 5.25 5.0% 5.5% Cost of equity 7.9% 7.5% 8.3% Corporate tax rate 30% (a) Calculate the weighted average cost of capital for KLM Corporation under the three separate capital structures, i.e. Current, Mix 1 and Mix 2. Write your answers...
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a...
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock and common equity capital) and is often presented as a percentage of the type of financing used As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure Which of the following statements regarding a firm's optimal capital...
Which of the following statements about capital structure and the WACC is CORRECT? A. Since debt...
Which of the following statements about capital structure and the WACC is CORRECT? A. Since debt financing is cheaper than equity financing, raising a company’s debt ratio will always reduce its WACC. B. Increasing a company’s debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company’s WACC. C. Since debt financing raises the firm's financial risk, increasing a company’s debt ratio will always increase its WACC. D. Increasing...
Which of the following statements concerning capital structure theory is NOT CORRECT? The major contribution of...
Which of the following statements concerning capital structure theory is NOT CORRECT? The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt. Under MM with zero taxes, financial leverage has no effect on a firm's value. Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt. Under...
According to the trade-off theory, a firm's optimal capital structure: Question 8 options: is the debt-equity...
According to the trade-off theory, a firm's optimal capital structure: Question 8 options: is the debt-equity ratio that results in the lowest possible weighted average cost of capital. exists when the debt-equity ratio is 0.50. is the debt-equity ratio that exists at the point where the firm's weighted after-tax cost of debt is minimized. is found by locating the mix of debt and equity which causes the earnings per share to equal exactly $1.
Which of the following statements regarding a firm's optimal capital structure are true? Check all that apply The optimal capital structure maximizes the firm's EPS The optimal capital structure minimizes the firm's cost of debt. The optimal capital structure minimizes the firm's cost of equity. The optimal capital structure minimizes the firm's WACC. The optimal capital structure maximizes the firm's stock price.
8. More on capital structure theory The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other factors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capital structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? Firms with a higher proportion of...
The trade-off theory relies on the threat of financial distress.
But why should a public corporation ever have to land in financial
distress? According to the theory, the firm should operate at the
top of the curve in Figure 1. Of course, market movements or
business setbacks could bump it up to a higher debt ratio and put
it on the declining, right-hand side of the curve. But in that
case, why doesn't the firm just issue equity, retire debt,...
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock and common equity capital) and is often presented as a percentage of the type of financing used As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure Which of the following statements regarding a firm's optimal capital...
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