The disadvantages of debt to the corporation include all but which of the following? Group of answer choices A. Indenture agreements may place burdensome restrictions on the firm. B. Interest and principal payments must be met regardless of performance results. C. Debt may have to be paid back with "cheaper" dollars because of inflation. D. Too much debt may depress the firm's stock price.

The disadvantages of debt to the corporation include all but which of the following? Group of answer choices A. Indenture agreements may place burdensome restrictions on the firm. B. Interest and principal payments must be met regardless of performance results. C. Debt may have to be paid back with "cheaper" dollars because of inflation. D. Too much debt may depress the firm's stock price.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 2QE

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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.
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
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.
Which of the following would likely encourage a firm to increase the debt in its capital structure? a. The corporate tax rate increases. b. The personal tax rate increases. c. Due to market changes, the firm’s assets become less liquid. d. Changes in the bankruptcy code make bankruptcy less costly to the firm. e. The firm’s sales and earnings become more volatile.
All of the following are likely to result in the use of less debt in a company's capital structure EXCEPT A. desire to maintain a high credit rating. B. desire to maintain financial flexibility. C. insufficient internal funds. D. a decrease in a company's marginal tax rate.
Agency costs of debt arise any time there is a conflict between lender interests and borrower interests. Assuming that agency costs of debt are high at a company relative to the rest of the market, other things being equal, which of the following would you expect to observe with the company's borrowing? It will be able to borrow less than other companies. AND It will have to pay lower interest rates on its loans than otherwise companies. It will have to pay lower interest rates on its loans than otherwise similar companies. It will have to pay lower interest rates on its loans than otherwise similar companies. AND It will face more "covenants" than otherwise similar companies. NONE. it will face more "covenants" than otherwise similar companies. It will be able to borrow less than other companies. It will be able to borrow less than other companies. It will face more "covenants" than otherwise similar companies.
If we drop the assumption that there are no information and transaction costs, in addition to dropping the no-tax assumption, then the Modigliani and Miller model suggests: Companies will not always increase their use of debt. Capital structure has no impact on companies’ value Capital structure has impact on companies’ cost of capital Companies will always increase their use of debt.
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 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.
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…
A company will prefer debt in its capital structure, if (tick the most appropriate alternative) (a) It wants to dilute control (b) Stock market conditions are bullish (c) Tax rates are high (d) It has already used its debt potential to the full.
Management and shareholders favor debt financing over equity financing for all of the following reasons, except A. The present owners remain in control of the corporation B. The interest incurred in debt financing is a deductible expense in arriving at taxable income while dividends are not C. The charge for interest on the debt may be less than the amount of dividends that might be expected by shareholders D. The interest on debt is not required to be paid periodically when the enterprise results in unfavorable operations and financial position