Indicate whether the following statements is true or false. Provide the relevant explanations. In the presence of corporate taxes, a company would prefer to raise debt only when the benefits of the tax shield fully offset the cost of debt. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)

Indicate whether the following statements is true or false. Provide the relevant explanations. In the presence of corporate taxes, a company would prefer to raise debt only when the benefits of the tax shield fully offset the cost of debt. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)

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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EXERCISE AIndicate whether each of the following statements is true or false. Support your answerswith the relevant explanations.A. 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.)
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…
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.)
Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. a) The higher the proportion of equity in a company’s overall capital structure, thehigher return required by its debtholders. (Explain your reasoning – provide a numerical example supporting your answer.) b) 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 – provide a numerical example supporting youranswer.) c) 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 –, provide a numerical example supporting youranswer.)
Indicate whether each of the following statements is true or false. Support vour answers with relevant explanations. A) The higher the proportion of equity in a company's overall capital structure the higher return required by its debtholders.B) In the presence of corporate taxes, a company would prefer to raide debt only when the benefits of the tax shield fully offset the cost of debt. C) 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.
Which is not a benefit of debt to the corporation?a. interest payments are tax deductibleb. when debt is used heavily, it increases stock valuec. In periods of inflation, debt is paid back with amounts that are worth less than the ones borrowed.d. compared to equity, debts have a lower cost of capitale. answer not given
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
Explain Why you agree or disagree with the following statement. The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations MM Proposition I with no tax supports the argument that a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress
Ques) Explain the contention that in the absence of the tax advantages of debt the use of gearing can increase the expected rate of return for shareholders, but not necessarily increase the value of their investment
Indicate whether the following statements are true or false. If the statementis false, explain why.d. The Tax Code encourages companies to pay a large percentage of theirnet income in the form of dividends.
Debt interest is a _______expense that is particularly important for companies with high tax rates.
Which of the following is a disadvantage of long-term debt as a means of company financing? Group of answer choices Debtholders have preferential status in the event of a company being wound up. Tax relief is available on interest payments. Debt is often quicker to arrange compared to equity. The amount and timing of interest payments is predictable, making budgeting easier.