Which of the following is true about debt and equity? Question 25 options: Debt returns are limited to the payment of interest and principal while equity returns are unlimited. An investor can lose the entire investment in equity but always enjoys some return on debt. All debt instruments accrue and pay interest and all public equity instruments pay dividends. Both debt and equity instruments must be repaid at some point.

Which of the following is true about debt and equity? Question 25 options: Debt returns are limited to the payment of interest and principal while equity returns are unlimited. An investor can lose the entire investment in equity but always enjoys some return on debt. All debt instruments accrue and pay interest and all public equity instruments pay dividends. Both debt and equity instruments must be repaid at some point.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 11MC: What is the value of Ls stock for volatilities between 0.20 and 0.95? What incentives might the...

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Mark buys a financial asset from the DBA. This financial asset is an instrument of short term borrowing. He hasbought it because he doesn’t want to take risk and wants an assured return. This instrument is promissory note. It ishighly liquid. The instrument is also known as zero coupon bonds. On this instrument it is written T-91. Based onthe above case study, answer the following:a. Which financial asset is indicated in the above case?b. On whose behalf does the DBA issue this instrument?c. Why is this instrument called as the zero coupon bond?d. What does T-91 denote here?e. What is the minimum amount for which this instrument bond?
Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. Modigliani and Miller’s Proposition II assumes that increased borrowing does not affect the interest rate on the firm’s debt. (Explain your reasoning.) Under the conditions of perfect capital markets, the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt. (Explain your reasoning.) 3. The higher the systematic risk of a company’s stock, the higher the value of its beta. The higher the beta, the higher the return required by the investors. (Explain your reasoning.) 4. The higher the proportion of equity in a company’s overall capital structure, the higher return required by its debtholders. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.) 5.In the presence of corporate taxes, a company would prefer to raise…
5.What is the major drawback of debt financing? Select one: You have to pay back the money Increasing debt changes the gearing ratio of the firm Interest payments must be made before shareholder dividends and irrespective of fluctuations in profits Lenders often require security of the loan against assets of the company
What is the value of Ls stock for volatilities between 0.20 and 0.95? What incentives might the manager of L have if she understands this relationship? What might debtholders do in response?
Straight debt and equity have very different payoff structures. Debt holders get paid "first", but only up to the amount they are owed. Equity holders get paid "last", but essentially get all the upside after the debtholders' obligation has been satisfied. Group of answer choices True False
1. When the effective cost of debt is greater its the nominal cost,a. the initial net measurement of the bond is more than the face value.b. The net proceeds is more than the face value.c. The entity records a discount on the bond payable.d. The interest expense is less than the interest payments.2. Which of these statement are true? [S1] The dividend decision generally involves the same factors as the earnings retention decision. [S2] Under the Dividend Relevance Theory, dividends are valued more than capital gains.3. The cost of retained earnings is less than the cost of ordinary shares because ofa. the issuance cost.b. the trust fund doctrine.c. agency costs of free cash flow.d. the taxation on earnings.4. GHI Corp., a new and relatively unknown entity, has issued 5-year bonds with an interest rate of 30%. These may also be traded in by the holder for 5 ordinary shares for every P1,000 face value of the bond. GHI added this feature so that once it has better profits, it can entice…
You want to invest in a company that guarantees your money's interest payments and returns at the maturity date as an investor. Which is the best option for this investment? a. bonds b. stocks c. stocks and bonds d. neither stocks nor bonds
Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. a) Modigliani and Miller’s Proposition II assumes that increased borrowing does not affect the interest rate on the firm’s debt. (Explain your reasoning.) b) Under the conditions of perfect capital markets, the cost of capital of a company financed fully by equity is expected to be equal to that of the same company but financed with 50% equity and 50% debt. (Explain your reasoning.) c) The higher the systematic risk of a company’s stock, the higher the value of its beta. The higher the beta, the higher the return required by the investors. (Explain your reasoning.)
30. On the part of the debtor, debt restructuring generally will result in Group of answer choices a. gain on exchange b. gain on debt restructuring c. loss on exchange d. loss on debt restructuring
1. Explain what a unsecured debt, subordinated debt, senior debt is? -is there risk in buying an unsecured debt and subsequently having the corp issue a senior debt? - Which types of debt of these would have the lowest interest rate, the highest?
The use of the equity method to account for equity investments between 20% and 50%, has been criticized by market observers. They claim that the use of equity method may allow potential off-balance sheet financing. Do you agree? Explain your answer.
According to Modigliani & Miller M Proposition II (MM Il), as a firm's debt-equity ratio decreases, what happens to the required rate of return on equity? Briefly explain including the key aspect of MM II.

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	Debt returns are limited to the payment of interest and principal while equity returns are unlimited.
	An investor can lose the entire investment in equity but always enjoys some return on debt.
	All debt instruments accrue and pay interest and all public equity instruments pay dividends.
	Both debt and equity instruments must be repaid at some point.