Which of the following is NOT an effect of the possibility of bankruptcy? O reduce the possible payoff to stockholders. increase financial distress costs. reduce the interest rate on debt. reduce the current market value of the firm.
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- What is cost of financial distress to the firm without going bankrupt?Give two examples.Which of the following terms refer to the situation in which a firm has negative net worth? Multiple Choice Legal bankruptcy. Liquidation. Accounting insolvency. Technical insolvency. Business failure.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.
- 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.Indicate whether the following statement is true or false.Provide the relevant explanations. 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 your reasoning – in your explanation, provide a numerical example supporting your answer.)Under Modigliani and Miller's assumption of perfect capital markets, which of the following is NOT CORRECT? A) The proper WACC equation under perfect capital markets is the "pre-tax" WACC B) Taxes are irrelevant C) Reducing the debt ratio can cause the cost of debt and the cost of equity to decline, even as the WACC stays the same. D) The WACC does not change as the weights of debt and equity change E) Bankruptcy costs reduce the amount bondholders receive when bankruptcy occurs
- What affect would an increase in the costs of bankruptcy have on the capital structure of a firm? Question 4 options: Higher bankruptcy costs make debt less expensive, so firms will use more debt and less equity. Higher bankruptcy costs make debt more expensive, so firms will use less debt and more equity. Bankruptcy costs have no impact on the capital structure decision.Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant? a. An increase in the corporate tax rate. b. An increase in the personal tax rate. c. The Federal Reserve tightens interest rates in an effort to fight inflation. d. The company's stock price hits a new low. e. An increase in costs incurred when filing for bankruptcy. Explain your answerWhich of the following statements is most correct? Why?* choices: a. The expected return on corporate bonds will generally exceed the yield to maturity. b. Firms that are in financial distress are forced to declare bankruptcy. c. All else equal, senior debt will generally have a lower yield to maturity than subordinated debt. d. Statements a and c are correct. e. None of the statements above is correct.
- Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. 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 your reasoning – in your explanation, provide a numerical example supporting your answer.)What affect would an increase in the cost of bankruptcy have on the capital structure of a firm? Question 10 options: Bankruptcy costs have no impact on the capital structure of firms Business risk will increase, so firms will use more debt and less equity Debt will become less expensive, so firms will use more debt and less equity Debt will become more expensive, so firms will use less debt and more equityWhat are the options available to a company in the event of a financial failure?