According to the trade-off theory, a firm's optimal capital structure: Question 11 options: exists when the...
According to the trade-off theory, a firm's optimal capital structure:
Question 11 options:
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exists when the debt-equity ratio is 0.50. |
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is the debt-equity ratio that results in the lowest possible weighted average cost of capital. |
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is found by locating the mix of debt and equity which causes the earnings per share to equal exactly $1. |
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is the debt-equity ratio that exists at the point where the firm's weighted after-tax cost of debt is minimized. |
Homework Answers
An optimal capital structure is formed when the WACC is minimized with the right combination of debt and equity. While increase in debt can provide tax benefits, a large increase can cause increase in default risk thus increasing the cost of equity concomitantly and the WACC.
Answer is is the debt-equity ratio that results in the lowest possible weighted average cost of capital.
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According to the trade-off theory, a firm's optimal capital
structure:
Question 11 options:
exists when the...
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.
please somebody help me answer this, the assignment is due in 1h According to the trade-off...
please somebody help me answer
this, the assignment is due in 1h
According to the trade-off theory, a firm's optimal capital structure: is the debt-equity ratio that exists at the point where the firm's weighted after- tax cost of debt is minimized. 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 found by locating the mix of debt and equity which causes the earnings per share...
ZYZ Inc. is considering a project with the following cash flows: Year Cash Flow (CF) 0...
ZYZ Inc. is considering a project with the following cash flows: Year Cash Flow (CF) 0 -$200,000 1 $30.000 2 $40,000 3 $50,000 4 $60,000 5 $70.000 If the discount rate is 5%, what is the NPV of the proposed project? $12.253.47 O $21,009.43 $10,572.99 $11,572.99 Question 22 (2 points) The primary idea behind the net present value rule is that an investment: O is worthwhile if it creates value for the owners. must have total cash flows that equal...
According to the trade-off theory, under which of the following conditions will a firm's capital structure...
According to the trade-off theory, under which of the following conditions will a firm's capital structure be optimal? Select one: a. Marginal bankruptcy-related costs = 0 b. Marginal tax shelter benefits - Marginal bankruptcy-related costs = Interest charges c. Debt/assets ratio = Marginal tax shelter benefits d. Marginal tax shelter benefits = Marginal bankruptcy-related costs e. Marginal tax shelter benefits = Interest charges
Refer to the figure for the comparison of MM propositions and the "trade-off theory" of capital...
Refer to the figure for the comparison of MM propositions and the "trade-off theory" of capital structure, as we discussed in lectures, there should be an optimal level of leverage ratio (or debt-equity ratio) according to the "trade-off theory". True or False?
1. The optimal capital structure has been achieved when the: A) debt-equity ratio is equal to...
1. The optimal capital structure has been achieved when the: A) debt-equity ratio is equal to 1. B) weight of equity is equal to the weight of debt. C) cost of equity is maximized given a pretax cost of debt. D) debt-equity ratio is such that the cost of debt exceeds the cost of equity. E) debt-equity ratio results in the lowest possible weighted average cost of capital. 2. M&M Proposition I with tax implies that the: A) weighted average...
The traditional theory of optimal capital structure states that firms trade off corporate interest tax shields...
The traditional theory of optimal capital structure states that firms trade off corporate interest tax shields against the possible costs of financial distress due to borrowing. What does this theory predict about the relationship between book profitability and target book debt ratios? Is the theory’s prediction consistent with the facts?
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,...
What is a firm's optimal capital structure? The optimal capital structure refers to a capital structure...
What is a firm's optimal capital structure? The optimal capital structure refers to a capital structure that: (Select the best choice below.) A. is comprised of 99.9% equity capital B. will minimize the composite cost of a firm's capital for raising a given amount of funds C. will minimize the firm's common stock price D. is comprised of 99.9% debt capital.
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...
please somebody help me answer
this, the assignment is due in 1h
According to the trade-off theory, a firm's optimal capital structure: is the debt-equity ratio that exists at the point where the firm's weighted after- tax cost of debt is minimized. 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 found by locating the mix of debt and equity which causes the earnings per share...
ZYZ Inc. is considering a project with the following cash flows: Year Cash Flow (CF) 0 -$200,000 1 $30.000 2 $40,000 3 $50,000 4 $60,000 5 $70.000 If the discount rate is 5%, what is the NPV of the proposed project? $12.253.47 O $21,009.43 $10,572.99 $11,572.99 Question 22 (2 points) The primary idea behind the net present value rule is that an investment: O is worthwhile if it creates value for the owners. must have total cash flows that equal...
1. The optimal capital structure has been achieved when the: A) debt-equity ratio is equal to 1. B) weight of equity is equal to the weight of debt. C) cost of equity is maximized given a pretax cost of debt. D) debt-equity ratio is such that the cost of debt exceeds the cost of equity. E) debt-equity ratio results in the lowest possible weighted average cost of capital. 2. M&M Proposition I with tax implies that the: A) weighted average...
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,...
What is a firm's optimal capital structure? The optimal capital structure refers to a capital structure that: (Select the best choice below.) A. is comprised of 99.9% equity capital B. will minimize the composite cost of a firm's capital for raising a given amount of funds C. will minimize the firm's common stock price D. is comprised of 99.9% debt capital.
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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