Is this statement true or false? Please explain in detail As debt-financing is usually cheaper than equity financing, debt-financing will lower risk for transnational company.
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Is this statement true or false? Please explain in detail
As debt-financing is usually cheaper than equity financing, debt-financing will lower risk for
transnational company.
Step by step
Solved in 2 steps
- There are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing? a. The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest b. The repayment of debt capital may affect the liquidity of the company c. If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets d. The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares e. Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the company(1) What factors might lead a company to gainadditional funds through debt financing rather thanthrough equity financing? (2) Why does consumerdebt have a more negative connotation than businessdebt?Which of the following statements is FALSE? As debt increases, the risk associated with bankruptcy and agency costs is reduced. Debt is often the least costly form of financing for a firm. Firms should probably use some debt in their capital structure. Different firms are subject to different levels of risk.
- Is it better to finance a company thru debt or thru equity? Why? What are the downside and upside to each?Which statement is most correct? * A. Since debt financing raises the firm’s financial risk, increasing debt ratio will increase WACC. B. Since debt financing is cheaper than equity financing, increasing debt ratio will reduce WACC. C. Increasing a firm’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the firm’s WACC. D. Statements a and c are correct. E. None of the aboveWhich of the following statement is incorrect about the Peking Order Theory? A.Firms with high ratios of fixed assets tend to have higher debt ratio.The evidence exclusively supports the peking order theory B.When exernal finance is required,firms issue debt first and equity as a last resort C.Most profitable firms borrow less not because they have lower target debt but because they don't need external finance D.Firms prefer internal finance since funds can be raised without sending advers signals
- Discuss the factors that affect the WACC. Also discuss how these factors may differ somewhat from country to country. For example, if a company has a stronger balance sheet than other companies in its industry, investors will likely be willing to accept a lower interest rates on its bonds and this will lower the company’s overall cost of capital.Which of the following is incorrect about the Pecking Order Theory? A.Firms with high ratios of fixed assets to total assets tend to have higher debt ratios.This evidence exclusively supports the pecking order theory B.When external finance is required,firms issue debt first and equity as a last resort C.Most profitable firms borrow less not because they have lower target debt ratios but beause they don't need external finance D.Firms prefer internal finance since funds can be raised without sending adverse signalsIf the financial market is frictionless, the cost of equity is higher than the cost of debt in all firms. Therefore, in this circumstance, firms must finance their projects by issuing debt rather than equity. Is it right?
- Critique this statement: “The use of debt financing lowers the net income of the firm, and hence debt financing should be used only as a last resort.”2. If a bank wants to avoid volatility in its regulatory capital, which investment classification would be the most desirable, and which investment classification would be the least desirable? Does your answer differ depending on whether the bank is large or small? In other words, do large and small banks differ on how they can categorize unrealized gains/losses on AFS debt?p18 Which of the following is true of debt financing? Firms whose sales are very stable are more likely to rely on debt financing than firms whose sales are volatile. Firms that pay dividends are more likely to use less debt financing than firms that retain most of their current earnings. Firms that are subject to a great degree of operating leverage are more likely to use debt financing than firms that don’t utilize fixed costs. All of the above