Why don’t firms increase their leverage as much as possible? (Check all that apply) A) Having...
Why don’t firms increase their leverage as much as possible? (Check all that apply)
A) Having too much debt increases the interest rate firms have to pay on their loans
B) It will increase their risk of bankruptcy
C) It will slow down the collection of receivables
D) It will increase their tax bill
Homework Answers
Correct options are (A) and (B).
The higher the leverage, the higher the proportion of debt in total capital structure, and the higher the default risk of the firm. So lenders become more cautious if leverage increases, and charge a higher interest rate.
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Why don’t firms increase their leverage as much as
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answer both
Why might too much leverage be a problem for an investment bank? O A. Leverage magnifies profit, but it also magnifies loss. O B. Too much leverage cannot be a problem for an investment bank. C. Too much leverage decreases the number of clients. O D. Too much leverage increases the book value against the market value of assets. Why might relying too much on short-term borrowing be a problem? O A. Too much short-term borrowing exposes the...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $4 million of EBIT, and is in the 40% federal plus state tax bracket. Firm HL, however, has a debt to capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 30% debt to capital ratio and pays only 10% interest on its debt....
FINANCIAL LEVERAGE EFFECTS Firms and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $27 million in invested capital has $5.4 million of EBIT, and is in the 40% federalplus-state tax bracket. Tim He, however, has a debt-to-capital ratio of 60% and pays 11% interest on its debt, whereas L has a 30% debt-to-capital ratio and pays only 8% interest on its debt. Neither form u s preferred stock in...
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