A limitation of the Degree of Financial Leverage formula is that we assume the cost of debt (interest) will remain constant as a firm borrows more and more. O True False UESTION 25 A company with predictable cash flows (a utility company) is better suited to use more debt in their capital structure than a company with fluctuating, unpredictable cash flows (an automobile company). True False UESTION 26 Depreciation is a OA. A. Non deductible cash expense OB. B. Deductible cash expense OC. Deductible non-cash expense O D. None of the above

A limitation of the Degree of Financial Leverage formula is that we assume the cost of debt (interest) will remain constant as a firm borrows more and more. O True False UESTION 25 A company with predictable cash flows (a utility company) is better suited to use more debt in their capital structure than a company with fluctuating, unpredictable cash flows (an automobile company). True False UESTION 26 Depreciation is a OA. A. Non deductible cash expense OB. B. Deductible cash expense OC. Deductible non-cash expense O D. None of the above

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 2P

See similar textbooks

Similar questions

4.7 Disadvantages of Financial Leverage. The intuition behind the benefits of financial leverage is that a firm can borrow funds that bear a certain interest rate but invest those funds in assets that generate returns in excess of that rate. Why would firms with high ROAs not keep leveraging up their firm by borrowing and investing the funds in profitable assets?
S1. Although the exact relationship between a firm's degree of financial leverage and its beta is difficult to estimate, it has been shown both theoretically and empirically that a firm's beta increases with its degree of financial leverage. S2. As the debt ratio rises, the WACC is reduced because the after-tax cost of debt is usually lower than the cost of equity. What limits the substitution of debt for equity in the capital structure is that as the debt ratio rises the costs of both components eventually increase. Both statements are true Statement 2 is true Statement 1 is true Both statements are false
S1. Although the exact relationship between a firm's degree of financial leverage and its beta is difficult to estimate, it has been shown both theoretically and empirically that a firm's beta increases with its degree of financial leverage. S2. As the debt ratio rises, the WACC is reduced because the after-tax cost of debt is usually lower than the cost of equity. What limits the substitution of debt for equity in the capital structure is that as the debt ratio rises the costs of both components eventually increase. Group of answer choices Statement 2 is true Both statements are false Statement 1 is true Both statements are true
Question 23 Which of the following is an advantage of equity financing vs debt financing? A If the company makes no profit in a year it has no legal obligation to pay a dividend. B paid to shareholders attract tax relief and so lower the company tax bill. C Equity holders can exert significant pressure of management of a company. D Equity financing can typically be used for all sizes of financing from a few hundred pounds to billions.
9. In an EBIT / EPS analysis, the risk behavior measured by the coefficient of variation makes it possible to verify that:a) The financing risk increases with increasing leverage.b) Financial risk is not directly dependent on leverage.c) Profitable companies borrow more frequently than unprofitable companies.d) UPA may be increased although the risk may decrease.
Ch. 14. Which one of the following is NOT an implication of market efficiency for corporate finance? Group of answer choices Managers can reap many benefits by paying attention to market prices Firms cannot successfully time issues of debt and equity Managers cannot profitably speculate in foreign currencies and other instruments Firms can successfully time issues of debt and equity Managers cannot fool the market through creative accounting
Which of the following statements are incorrect regarding how much debt a company should borrow? Choose all that apply. Question 9 options: A As long as the company can generate higher returns on its new projects than its borrowing interest rate, borrowing more debt will enhance the company's ROE. B Borrowing more debt will increase a company's distress level. C The bigger the company, the more it should borrow D Debt is considered a more expensive capital source.
Module 6 Question 4 (Calculating capital structure weights) Winchell Investment Advisors is evaluating the capital structure of Ojai Foods. Ojai's balance sheet indicates that the firm has $51.82 million in total liabilities. Ojai has only $38.88 million in short- and long-term debt on its balance sheet. However, because interest rates have fallen dramatically since the debt was issued, Ojai's short- and long-term debt has a current market price that is 10 percent over its book value or $42.77 million. The book value of Ojai's common equity is $50.57 million but the market value of the equity is currently $101.07 million. a. What is Ojai's debt ratio and interest-bearing debt ratio calculated using book values? b. What is Ojai's debt-to-enterprise-value ratio calculated using the market values of the firm's debt and equity and assuming excess cash is zero? c. If you were trying to describe Ojai's capital structure to a potential lender (i.e., a bank),…
[S1] Operating leverage will decrease as the company's margin of safety increases. [S2]The break-even point for a capital intensive, automated company will tend to be higher than for a less capital intensive company while the margin of safety will tend to be lower. Only S1 is true. Only S2 is true. Both statements are true. Both statements are false.
27. A primary financial market is one that: A. offers financial assets with the highest expected return B. offers the greatest number of financial assets C. offers financial assets with the highest historical return D. involves the sale of financial assets for the first time
Question 32 a. Why is share valuation more difficult than bond valuation? b. Identify and explain the weaknesses of the payback period method of capital budgeting.