In a Modiqliani and Miller world with corporate taxes, companies A and B are identical except for their capital structure. While A is unlevered, D>0. Let T denote the corporate tax rate. Which of the following statement is False? A. The value of B’s equity is larger than the value of A’s equity B. The total value of B is larger than the total value of A C. The value of B’s debt is larger than the value of A’s debt D. The difference in the total value of the two companies is equal to TD

In a Modiqliani and Miller world with corporate taxes, companies A and B are identical except for their capital structure. While A is unlevered, D>0. Let T denote the corporate tax rate. Which of the following statement is False? A. The value of B’s equity is larger than the value of A’s equity B. The total value of B is larger than the total value of A C. The value of B’s debt is larger than the value of A’s debt D. The difference in the total value of the two companies is equal to TD

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter15: Distributions To Shareholders: Dividends And Repurchases

Section: Chapter Questions

Problem 2Q: How would each of the following changes tend to affect aggregate payout ratios (that is, the average...

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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
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For a typical firm, assumes that all rates are after taxes and that the firm operates at its target capital structure. So cost of equity > after tax cost of debt > WACC. True False
Why is the standard flotation cost for an IPO equal to 7%? A) Because investment banking is a commodity business, and this fee is subsidized by the Securities and Exchange Commission (SEC) to ensure that banks continue to provide this necessary service to help maintain efficient capital flows B) None of the other answers are correct. C) This is required by the Securities and Exchange Commission (SEC) D) Because the standard fee has been defined as one-third of the top US corporate tax rate, which currently is 21%
What is the relative tax advantage of corporate debt if the corporate tax rate Tc = 21%, thepersonal tax rate Tp = 37%, but all equity income is received as capital gains and escapestax entirely (TpE = 0%)? How does the relative tax advantage change if the companydecides to pau out all equity income as cash dividends that are taxed at 20%?
Please answer the following follow up questions Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. d) The higher the proportion of equity in a company’s overall capital structure, thehigher return required by its debtholders. (Explain your reasoning – in yourexplanation, provide a numerical example supporting your answer.) e) In the presence of corporate taxes, a company would prefer to raise debt onlywhen the benefits of the tax shield fully offset the cost of debt. (Explain yourreasoning – in your explanation, provide a numerical example supporting youranswer.) f) In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain yourreasoning – in your explanation, provide a numerical example supporting youranswer.)
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.
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Which of the following statements is CORRECT? Group of answer choices When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM. If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough reinvested earnings to take care of its equity financing and hence must issue new stock. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.