If the after-tax cost of debt is less than the cost of equity in a fırm, which of the following relationships must be true? Assume this firm has no preferred stock. (Multiple Choice) WACC = After-Tax Cost of Debt < Cost of Equity After-Tax Cost of Debt < WACC < Cost of Equity After-Tax Cost of Debt < Cost of Equity < WACC After-Tax Cost of Debt < Cost of Equity = WACC WACC < After-Tax Cost of Debt < Cost of Equity

If the after-tax cost of debt is less than the cost of equity in a fırm, which of the following relationships must be true? Assume this firm has no preferred stock. (Multiple Choice) WACC = After-Tax Cost of Debt < Cost of Equity After-Tax Cost of Debt < WACC < Cost of Equity After-Tax Cost of Debt < Cost of Equity < WACC After-Tax Cost of Debt < Cost of Equity = WACC WACC < After-Tax Cost of Debt < Cost of Equity

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 1Q: Define each of the following terms: Weighted average cost of capital, WACC; after-tax cost of debt,...

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Define each of the following terms: Weighted average cost of capital, WACC; after-tax cost of debt, rd(1 – T); after-tax cost of short-term debt, rstd(1 – T) Cost of preferred stock, rps; cost of common equity (or cost of common stock), rs Target capital structure Flotation cost, F; cost of new external common equity, re
When one uses the after-tax weighted average cost of capital (WACC) to value a levered firm, the interest tax shield is: Multiple Choice A) capitalized by the levered cost of equity. B) not accounted for by the use of the WACC. C) automatically considered because the after-tax cost of debt is included within the WACC formula. D) considered by deducting the interest payment from the cash flows.
While computing the cost of equity using the formula , rs=D1P0+grs=D1P0+g, we do not make any adjustment to express the cost of equity on an after-tax basis whereas while computing the cost of debt, a tax adjustment is required to arrive at after-tax cost of debt. Why is this so?
Which of the following is CORRECT? Select one: a. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. b. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. c. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of common stock as measured by the CAPM. d. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC. e. All of the above are correct. Which of the following is CORRECT? Select one: a. If the NPV of a project is negative, the IRR for the project must also be negative. b. A project's MIRR can never exceed its IRR. c. If a project with normal cash flows has an IRR less than WACC, the project must have a positive NPV. d. If Project 1's IRR exceeds Project 2's IRR, then 1 must…
How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratio
Everything else remaining the same, the cheapest source in the calculation of WACC is: A) after tax cost of debt B) preferred stock C) cost of external equity D) cost of internal equity
How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.
How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratio 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.
Discuss why the after-tax cost of equity (common or preferred) does not have to be adjusted by the marginal income tax rate for the firm.
The after-tax cost of debt is ________. A) lower than the cost of common stock but higher than the cost of preferred stock. B) lower than the cost of preferred stock but higher than the cost of common stock. C) lower than both the cost of preferred stock and the cost of common stock. D) None of the above.
Which of the following statements is CORRECT? a. WACC calculations should be based on the before-tax costs of all the individual capital components. b. Flotation costs associated with issuing new common stock normally reduce the WACC. c. An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing. d. A change in a company's target capital structure cannot affect its WACC. e. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.
According to MM propositions, at what debt-equity ratio should the cost of equity be the lowest? Group of answer choices Zero if there is no tax and 1 if a non-zero tax rate is applied. Zero. Infinitely large Zero if there is no tax and indefinitely large if a non-zero tax rate is applied.