Question

The main advantage of using debt financing is the a. effect on cost of capital b....

The main advantage of using debt financing is the

a. effect on cost of capital

b. availability of interest tax shields

c. lower probability of financial distress

d. reduced variability of earnings

0 0
Add a comment Improve this question Transcribed image text
Answer #1

The main advantage of debt financing is the lower probability of financial distress.

Add a comment
Know the answer?
Add Answer to:
The main advantage of using debt financing is the a. effect on cost of capital b....
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Equity Lightning Corp. wishes to explore the effect on its cost of capital of the rate...

    Equity Lightning Corp. wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing using retained earnings is 14%, the cost of preferred stock financing is 9%, and the before-tax cost of debt financing is 11%. Calculate the weighted average cost of capital (WACC) given the following tax rate assumptions:...

  • One of the main objectives of any firm is to arrange its capital structure to minimize...

    One of the main objectives of any firm is to arrange its capital structure to minimize taxable income for both the company and the shareholders. Because companies enjoy a tax deduction for interest expense there often can be an overall financial advantage to debt financing. Under the recent tax law overhaul, the top marginal rate personal income tax rate is 37%, income for corporations is taxed at a flat 21 %, and the prevailing rate on equity income (dividends and...

  • Which of the following should be true about the cost of equity capital? Re unlevered >...

    Which of the following should be true about the cost of equity capital? Re unlevered > Re levered Re unlevered < Re levered Re unlevered = Re levered Part 2: Which of the following is a side effect to financing? The cost of issuing new securities Financial distress The tax subsidy to debt All of the above

  • 4 P9-12 The effect The effect of tax rate on WACC K. Bell Jewelers wishes to...

    4 P9-12 The effect The effect of tax rate on WACC K. Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred stock, and 50% common stock. The cost of financing with retained earnings is 10%, the cost of preferred stock financing is 8%, and the before-tax cost of debt financing is 6%. Calculate the weighted...

  • Companies that use debt in their capital structure are said to be using financial leverage. Using...

    Companies that use debt in their capital structure are said to be using financial leverage. Using leverage can increase shareholder returns, but leverage also increases the risk that shareholders bear. Consider the following case: Water and Power Co. is a small company and is considering a project that will require $650,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project...

  • Steinberg Corporation and Dietrich Corporation are apparently identical firms except that Dietrich has more leverage. Both...

    Steinberg Corporation and Dietrich Corporation are apparently identical firms except that Dietrich has more leverage. Both companies will remain in business for one year. The companies’ economists agree that the probability of continuation of the current expansion is 80 percent for the next year, and the probability of recession is 20 percent. If the expansion continues, each firm expects to generate earnings before interest and taxes (EBIT) of $2.7 million. If the recession occurs, each firm expects to generate EBIT...

  • 15. What is the debt ratio (i.e., the weight of debt) that has outstanding $15 million...

    15. What is the debt ratio (i.e., the weight of debt) that has outstanding $15 million in bonds and equity with a market value of $35 million? a. 35% b. 43% c. 30% d. 15% 16. Let's say a firm has $5,500 of bonds and $11,000 of common stocks. You find the after-tax cost of debt for this firm equals 6%, and the cost of its common stock is 16%. Question: what is the firm's weighted average cost of capital?...

  • P9-12 The effect of tax rate on WACC K. Bell jewelers wishes to explore the effect...

    P9-12 The effect of tax rate on WACC K. Bell jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred stock, and 50% common stock. The cost of financing with retained earnings is 10°, the cost of preferred stock financing is 8% and the before-tax cost of debt financing is 6º. Calculate the weighted average cost of...

  • Brief Exercise 9-60 Cost of Debt Financing Crackle Company instituted an aggressive plan to lower its...

    Brief Exercise 9-60 Cost of Debt Financing Crackle Company instituted an aggressive plan to lower its cost of financing over the next decade. Currently Crackle's cost of debt financing is 8%, its cost of equity financing is 14%, and its tax rate is 35%. Crackle currently has $2,500,000 of debt. Required: Calculate the after-tax cost amount of interest expense.

  • HELP ME PLEASE! 24. Consider the following leverage scenarios Leverage Scenarios (000s) #2 50% Debt #1 0% Debt #3 80% Debt Capital Debt Equity Total capital Shares $10 Revenue Less costs/ expenses EB...

    HELP ME PLEASE! 24. Consider the following leverage scenarios Leverage Scenarios (000s) #2 50% Debt #1 0% Debt #3 80% Debt Capital Debt Equity Total capital Shares $10 Revenue Less costs/ expenses EBIT Interest expense (10%) EBT Taxes @ 40% Earnings after tax ROE EPS $1,600 400 $1,000 1,000 $2,000 $2,000 1,800 200 $2,000 1,800 200 100 100 40 $2,000 1,800 200 160 200 80 16 6% 6% 6% If under certain circumstances, financial leverage enhances performance measured by ROE...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT