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Q: Why might it be rational for a small firm that does not have access to the capital markets to use…
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Q: A company will prefer debt in its capital structure, if (tick the most appropriate alternative) (a)…
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Q: What method would be the least risky to raise capital if it has a less-than-favorable credit rating?
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Q: If the present value of a firm’s marginal financial distress costs are less than the present value…
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Q: Which of the following statements is FALSE? When a firm faces financial distress, it may choose not…
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“Having zero debt in the firm’s capital structure is not an ideal scenario.” Do you agree with
this statement? Explain
Step by step
Solved in 3 steps
- Which of the following statements is FALSE? A. Equity cost of capital is normally higher then cost of debt, thus cost of debt can be examined in isolation. B. No matter if a firm is unlevered or levered, there is no difference in the market value of the firms total securities and market value of the firm’s assets. C. Introducing debt increases the risk even though it may be cheap and consequently increases firms equity cost of capital. D. Cost of Capital of equity and Leverage can be explicitly explained by first proposition that Modigliani and Miller introduced.Why do most analysts recommend against having a capital structure of zero debt?Which of the following statements is FALSE? As debt increases, the risk associated with bankruptcy and agency costs is reduced. Debt is often the least costly form of financing for a firm. Firms should probably use some debt in their capital structure. Different firms are subject to different levels of risk.
- If we drop the assumption that there are no information and transaction costs, in addition to dropping the no-tax assumption, then the Modigliani and Miller model suggests: Companies will not always increase their use of debt. Capital structure has no impact on companies’ value Capital structure has impact on companies’ cost of capital Companies will always increase their use of debt.Koffman Corporation is trying to raise capital. What method would be the least risky to raise capital if it has a less-than-favorable credit rating?Kidman corporation is trying to raise capital. What method would be the least risky to raise capital if it has a less-than-favorable credit rating?
- True or False An all-equity financed firm will not have any financial risk8. Which of the following statements is FALSE? When a firm faces financial distress, it may choose not to finance new, positive-NPV projects. An under-investment problem occurs when shareholders choose to not invest in a positive-NPV project. Agency costs represent another cost of increasing the firm's leverage that will affect the firm's optimal capital structure choice. The agency costs of debt can arise only if there is no chance the firm will default and impose losses on its debt holders.Why might it be rational for a small firm that does not have access to the capital markets touse the payback method rather than the NPV method?
- According to Modigliani and Miller Proposition II: A. WACC curve is flat and hence no optimal capital structure exists B. WACC curve is upward slopping , indicating the equity financing exclusively being the optimal capital structure of a company C. WACC curve is downward slopping, hence the perfect capital structure is 100% debt D. An optimal capital structure exists as it is the balance between the tax benefit and the bankruptcy costsWhich of the following is a valid reason for a firm not to use as much debt as it can raise? Group of answer choices The use of more debt is expected to result in an increase in the firmʹs cost of capital when everything is considered More debt will increase the firmʹs riskiness All of them are valid reasons for a firm to use less debt than might be available The use of more debt is expected to result in a lower price/earnings ratioThe Nobel Prize-winning Modigliani & Miller Theory states that a firm’s capital structure does not matter. It is based on three key assumptions: No income taxes Equal borrowing cost- individuals can borrow at the same interest rate as corporations. Perfect markets: There are no bankruptcy, transaction, contracting, or agency costs. Are these assumptions reasonable? What are the implications if the assumptions do not hold?
