If you know that your firm is facing relatively poor prospects but needs new capital, and you know that investors do not have this information, signaling theory would predict that you would Group of answer choices Convey your inside information to investors using the media to eliminate the information asymmetry. Issue debt to maintain the returns of equity holders. Postpone going into capital markets until your firm's prospects improve. Be indifferent between issuing debt and equity. Issue equity to share the burden of decreased equity returns between old and new shareholders.

If you know that your firm is facing relatively poor prospects but needs new capital, and you know that investors do not have this information, signaling theory would predict that you would Group of answer choices Convey your inside information to investors using the media to eliminate the information asymmetry. Issue debt to maintain the returns of equity holders. Postpone going into capital markets until your firm's prospects improve. Be indifferent between issuing debt and equity. Issue equity to share the burden of decreased equity returns between old and new shareholders.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 4MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....

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David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: d. Suppose that Firms U and L have the same input values as in Part c except for debt of 980,000. Also, both firms have total net operating capital of 2,000,000 and both firms are expected to grow at a constant rate of 7%. (Assume that the EBIT in part c is expected at t = 1.) Use the compressed adjusted present value (APV) model to estimate the value of U and L. Also estimate the levered cost of equity and the weighted average cost of capital.
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Which is the best explanation of how dividends could convey information to investors that could affect the value of a firm? A. Promises to pay dividends limit the ability of managers to accumulate too much cash and to make unwise investments with that cash. B. Investors are skeptical when managers claim that prospects for the firm are bright, but by committing to paying a dividend, managers are adding credibility to their statements about the firm's future. C. Dividends are a more tax efficient way to generate returns for shareholders. D. By paying dividends consistently, investors will come to see dividend payments as less risky than capital gains. Give typing answer with explanation and conclusion
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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.
Investors invest in a firm because they are motivated by the potential return on their investment. In evaluating a firm's potential for delivering that rate of return, what do they most look for in a firm's projections? The firm's ability to pay dividends The firm's plans to stock up on inventory in order to never run out of stock The firm's plans to extend credit terms to customers in order to gain more sales The firm's ability to generate cash by liquidating its marketable securities portfolio