4. If the opportunity cost of borrowing is much higher than the cost of using one’s savings, then… A. It is better to finance the business thru borrowing B. Finance the business thru issuance of common shares C. Finance the business thru the issuance of preferred shares D. Finance the business thru the company’s own savings

4. If the opportunity cost of borrowing is much higher than the cost of using one’s savings, then… A. It is better to finance the business thru borrowing B. Finance the business thru issuance of common shares C. Finance the business thru the issuance of preferred shares D. Finance the business thru the company’s own savings

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter12: Balanced Scorecard And Other Performance Measures

Section: Chapter Questions

Problem 12MC: The cost of equity is _______. A. the interest associated with debt B. the rate of return required...

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5. Consider the following two potential transactions: (i) borrow from a bank; and (ii) use the proceeds from borrowing to pay out dividend. Assume this is an NFA firm. The combination of two financial transactions will A. reduce the financial leverage (FLEV) and the firm will continue to be an NFA firm.B. reduce the financial leverage (FLEV) and the firm will switch to an NFO firm.C. increase the financial leverage (FLEV) and the firm may become be an NFO firm.D. increase the financial leverage (FLEV) and the firm cannot be an NFA firm anymore.
Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. A company earns a higher return with borrowed funds than it pays in interest.
Which of the following can be described as involving indirect finance? a. People pay premiums to an insurance company b. A corporation issues new shares to people c. People lend money to their friends d. People buy bonds from companies
1. Cost of money Everyone uses money, and it is important to understand what factors affect the cost of money. Consider the following scenario: A friend comes to you and asks you to invest in his business instead of investing in Treasury bonds. You think he has a good business model, so you tell him you are willing to invest as long as the expected return on the investment is at least four times the return you would have received on the Treasury bonds. Determine which of these fundamental factors is affecting the cost of money in the scenario described: Risk Inflation Time preferences for consumption
The cost of equity is _______. A. the interest associated with debt B. the rate of return required by investors to incentivize them to invest in a company C. the weighted average cost of capital D. equal to the amount of asset turnover
11.Explain why a firm needs to understand their allocation of debtfinancing to equity (the amount the owner used to fund thebusiness). Discuss how this allocation can impact their Total DebtRatio. Can having too much debt bring down profit margins? Why orWhy Not?
Explain how continuous reliance on debt financing will affect the return to the equity holders or shareholders of your company following the arguments of M&M proposition 2
Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. A company earns a lower return with borrowed funds than it pays in interest.
Financing with Debt Versus Equity. It is commonly understood that the cost of financing a business’sasset purchases with debt is cheaper than financing those purchases with equity. Discuss why debt financing is cheaper than equity financing. Is there a set of circumstances when the cost of debt financing would exceed the cost of equity financing? If so, when?
Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. a) Modigliani and Miller’s Proposition II assumes that increased borrowing does not affect the interest rate on the firm’s debt. (Explain your reasoning.) b) Under the conditions of perfect capital markets, the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt. (Explain your reasoning.) c) The higher the systematic risk of a company’s stock, the higher the value of its beta. The higher the beta, the higher the return required by the investors. (Explain your reasoning.)
Assume that Mr James wants to invest his savings in less risky financial instruments with minimum rate of return per annum. Therefore he invested his savings in some financial assets in which returns will be guarantee even if the company will be in losses also. The financial instruments purchased by Mr James is known as: O a. Preference shares b. Equity shares c. Partnership shares d. Debentures
Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. Modigliani and Miller’s Proposition II assumes that increased borrowing does not affect the interest rate on the firm’s debt. (Explain your reasoning.) Under the conditions of perfect capital markets, the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt. (Explain your reasoning.) 3. The higher the systematic risk of a company’s stock, the higher the value of its beta. The higher the beta, the higher the return required by the investors. (Explain your reasoning.) 4. The higher the proportion of equity in a company’s overall capital structure, the higher return required by its debtholders. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.) 5.In the presence of corporate taxes, a company would prefer to raise…