4. If a higher ROE is desirable, why don't companies take on large amounts of debt? a. Additional debt reduces the risk to investors since their investment in the company is less b. Companies will low leverage more efficient c. Companies with lower leverage are more attractive to investors d. Highly leveraged companies are less efficient e. The cost of debt will eventually exceed the return on the additional assets acquired from the debt financing

4. If a higher ROE is desirable, why don't companies take on large amounts of debt? a. Additional debt reduces the risk to investors since their investment in the company is less b. Companies will low leverage more efficient c. Companies with lower leverage are more attractive to investors d. Highly leveraged companies are less efficient e. The cost of debt will eventually exceed the return on the additional assets acquired from the debt financing

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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2. The Trade-Off Model A. "The trade-off model of debt financing implies that an increase in the interest rate on debt will cause the level of debt to decline." Do you agree or disagree? Please explain. B. Discuss the likely effects of an increase in uncertainty about cash flows on the responsiveness of a firm's debt level to changes in the interest rate on debt.
Please explain if a company has already taken too much debt (exceeded the amount that they can borrow) but has strong equity value, can this company be a leverage buyout (LBO) target? Please reply. Thanks.
Assume that there is corporate tax, but no other frictions. Based on the propositions of Modigliani and Miller, which statement is the least accurate? Oa. The weighted cost of capital decreases as the leverage ratio increases. D. The cost of debt increases as the leverage ratio increases. C. Firm value increases as the firm takes on more debts. d. The cost of equity increases as the leverage ratio increases. O e. The optimal structure is 100% debt.
The required return on assets will change, if O a. one of the firm's business lines is closed. O b. leverage increases. O C. if the credit rating companies downgrade the firm's corporate debt. O d. if the interest payment to creditors increases.
Debt overhang occurs when: 1. A company is so indebted that it has little incentive to invest as all the cash flows generated by investments are expected to be appropriated by creditors 2. A company has plenty of free cash flows but few investment opportunities 3. A company issues debt to pay dividends to its shareholders 4. A company carries excessive debt, so that it has the incentive to invest in high risk projects at the expense of creditors
Which of the following is a disadvantage of long-term debt as a means of company financing? Group of answer choices Debtholders have preferential status in the event of a company being wound up. Tax relief is available on interest payments. Debt is often quicker to arrange compared to equity. The amount and timing of interest payments is predictable, making budgeting easier.
Which of the following statements is correct? A firm has a greater likelihood of needing an unexpected loan when its cash flows are relatively constant over time. The cost of borrowing affects the target cash balance of a firm. Management's desire to maintain a low cash balance has no effect on the borrowing needs of a firm. The target cash balance increases as the interest rate rises. The target cash balance decreases as the order costs increase.
(b) Assume that Modigliani-Miller Propositions 1 and 2 hold. Ex- plain carefully why the conclusion of each of the following argu- ments is incorrect: (i) As a firm borrows more and debt becomes risky, both share- holder and bondholders demand higher rates of return. Thus, by reducing its debt ratio, a firm can reduce both the cost of debt and the cost of equity. (ii) As leverage increases, the ratio of the market value of a firm's equity to income (after debt interest) increases.
Please answer this in short-way is okay. thank you
What make ROE(return on equity) of a company decrease further into negatives even though their financial leverage starts to rises? If a company multiplier for financial leverage starts to rise, what does it implies? Why?
A Moving to another question will save this response. Question 6 According to the risk shifting (or asset substitution) hypothesis Shareholders are keen to take excessively risky projects as they do not internalize the negative externality to bondholders O Firms should never pay dividends O Companies become too conservative in their investment when debt levels are such that bankruptcy is a likely outcome O It is always optimal to reduce leverage as this reduces expected bankruptcy costs A Moving to another question will save this response. ipeg WhatsApp Image..jpeg WhatsApp Image.jpeg WhatsApp Image...jpeg WhatsApp Image..jpeg WhatsApp Im. Shot on vivo Z1x 00 16°C Mostly cloudy WIDE Vivo Al camera
7. The reason firms care about the amount of debt they use is because a. There are tax benefits to debt, so capital structure can affect the value of the firm b. Firms don't care about their amount of debt c. There are tax benefits of equity, so using debt can replace valuable equity d. None of the above 8. When an economy has a risk-free asset, all risk-averse investors should invest in either the risk-free asset or the highest Sharpe-ratio risky asset (or both) a. True b. False c. Too little information to tell d. None of the above 9. The CAPM equation (Security Market Line) is a useful tool when trying to identify a company's a. Weight Average Cost of Capital b. Required Return on Equity c. Expected Return on Equity d. All of the above