In a world with corporate taxes, the market value of a firm’s assets can increase through the introduction of debt into the firm’s capital structure.In no more than 6 lines, comment on this statement. 16.The empirical evidence concerning financing decisions made by firms supports the idea that financing decisions are made randomly by firms with no real impact on firm value. In no more than 6 lines, comment on this statement.

In a world with corporate taxes, the market value of a firm’s assets can increase through the introduction of debt into the firm’s capital structure.In no more than 6 lines, comment on this statement. 16.The empirical evidence concerning financing decisions made by firms supports the idea that financing decisions are made randomly by firms with no real impact on firm value. In no more than 6 lines, comment on this statement.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....

See similar textbooks

Similar questions

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.
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: Now assume that Firms L and U are both subject to a 25% corporate tax rate. Using the data given in part b, repeat the analysis called for in parts b(1) and b(2) using assumptions from the MM model with taxes.
For each statement indicate whether it is true or false and briefly explain why. a) In a perfect capital market with no corporate taxes, as a firm takes on more and more debt its weighted average cost of capital remains unchanged while its required return on equity rises. b) If a firm issues riskfree debt the risk of the firm’s equity will not change. So, risk-free debt allows the firm to get the benefit of a low cost of debt without raising its cost of equity. c) In the context of firms’ capital structure decisions, the theory predicts that the value of a firm’s equity will rise in direct proportion to the level of debt in its capital structure.
Which one of the following is NOT an implication of market efficiency for corporate finance? Group of answer choices Firms cannot successfully time issues of debt and equity Firms can successfully time issues of debt and equity Managers cannot fool the market through creative accounting Managers cannot profitably speculate in foreign currencies and other instruments Managers can reap many benefits by paying attention to market prices Which one of the following is not a characteristic of Modigliani-Miller Propositions with corporate taxes? Group of answer choices individuals and corporations borrow at the same rate There are no transaction or bankruptcy costs Corporations are taxed at the rate TC on earnings after interest There are no taxes The cost of equity rises with leverage because the risk to equity rises with leverage _______ specifies an action that the company agrees to take or a condition the company must abide by. Group of answer choices milking the property…
In a world with corporate taxes but no possibility of financial distress, the value of the firm is maximized when the: Firm uses the maximum amount of debt in its capital structure. Firm uses a debt-equity ratio of 1.0. Firm uses no debt in its capital structure. Corporate tax rate approaches 100%.
Hi Expert,I got this theoretical question in Corporate Finance, and i was hoping for a bit of help :) Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. Best,Christian
5. The relationship between a firm's capital structure and othercompany attributes As a firm takes on more debt, its probability of bankruptcy . Other factors held constant, a firm whose earnings are relatively volatile faces a chance of bankruptcy. Therefore, when other factors are held constant, a firm whose earnings are relatively volatile should use debt than a more stable firm. When bankruptcy costs become more important, they the tax benefits of debt. General Forge and Foundry Corporation currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm’s unlevered beta is 1.25, and its cost of equity is 13.00%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 13.00%. The risk-free rate of interest (rRFrRF) is 3%, and the market risk premium (RPMRPM) is 8%. General Forge’s marginal tax rate is 25%. General Forge is examining how…
In a world with corporate taxes, the market value of a firm’s assets can increase through the introduction of debt into the firm’s capital structure. In no more than 6 lines, comment on this statement.
Which of the following would reduce a firm's WACC after tax? a. A firm invests in an average-risk project using equity, rather than debt financing. b. A supermarket chain decides to establish hardware stores which increases its systematic risk. c. A firm issues shares and uses the proceeds to pay off a bank loan. d. A firm issues bonds and uses the proceeds to repurchase stock. e. A firm significantly improves its operating cost control to boost profits.
Which of the following statements is correct? a. As Modigliani and Miller made clear in their original work, capital structure does not matter in perfect capital markets. Thus, if capital structure does matter, then it must stem from a market imperfection. b. Because corporations pay taxes on their profits after interest payments are deducted, interest expenses increase the amount of corporate tax firms must pay. c. To determine the loss due the leverage for the value of the firm, we must compute the present value of the stream of future interest tax shields the firm will receive minus the stream of future dividends. d. By increasing the amount paid to debt holders through interest payments, the amount of the pre-tax cash flows that must be paid as taxes increases. e. In general, the gain to lenders from the tax deductibility of interest payments is referred to as the interest tax benefit.
Which of the following is most consistent with using debt to reduce agency costs or conflicts? Question 11 options: Increasing debt reduces a firm’s business risk The interest paid on debt reduces taxable income and income taxes The interest paid on debt reduces cash that management of a firm might otherwise waste or use poorly The issuance of debt helps firms increase their credit rating
Which of the following makes this a true statement? In this slightly more realistic world with corporate taxes, managers can: Multiple Choice maximize the firm's value by taking on as much equity as possible. maximize the firm's value by taking on as much debt as possible. minimize the firm's value by taking on as much debt as possible. maximize the firm's value by financing only with debt.