EBK CORPORATE FINANCE
11th Edition
ISBN: 8220102798878
Author: Ross
Publisher: YUZU
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Textbook Question
Chapter 15, Problem 9CQ
Long-Term Financing As was mentioned in the chapter, new equity issues are generally only a small portion of all new issues. At the same time, companies continue to issue new debt. Why do companies tend to issue little new equity but continue to issue new debt?
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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.
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
Financing with Debt Versus Equity.
It is commonly understood that the cost of financing a business’sasset
purchases with debt is cheaper than financing those purchases with equity. Discuss why debt financing is cheaper
than equity financing. Is there a set of circumstances when the cost of debt financing would exceed the cost of equity financing?
If so, when?
Chapter 15 Solutions
EBK CORPORATE FINANCE
Ch. 15 - Bond Features What are the main features of a...Ch. 15 - Prob. 2CQCh. 15 - Preferred Stock Preferred stock doesnt offer a...Ch. 15 - Preferred Stock and Bond Yields The yields on...Ch. 15 - Prob. 5CQCh. 15 - Call Provisions A company is contemplating a...Ch. 15 - Prob. 7CQCh. 15 - Preferred Stock Do you think preferred stock is...Ch. 15 - Long-Term Financing As was mentioned in the...Ch. 15 - Internal versus External Financing What is the...
Ch. 15 - Prob. 11CQCh. 15 - Classes of Stock Several publicly traded companies...Ch. 15 - Callable Bonds Do you agree or disagree with the...Ch. 15 - Bond Prices If interest rates fall, will the price...Ch. 15 - Sinking Funds Sinking funds have both positive and...Ch. 15 - Prob. 1QPCh. 15 - Prob. 2QPCh. 15 - Prob. 3QPCh. 15 - Prob. 4QPCh. 15 - Financial Leverage Kiedis, Corp., has...Ch. 15 - Financial Leverage Frusciante, Inc., has 290,000...Ch. 15 - Financial Leverage Harrison, Inc., has the...Ch. 15 - Valuing Callable Bonds KJC, Inc., plans to issue 5...Ch. 15 - Valuing Callable Bonds New Business Ventures,...Ch. 15 - Valuing Callable Bonds Bowdeen Manufacturing...Ch. 15 - Prob. 11QPCh. 15 - Prob. 12QP
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which of the following is true regarding a company assuming more debt? Select one: a. Assuming more debt is always bad for the company b. Assuming more debt reduces leverage c. Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds d. Assuming more debt is always good for the companyarrow_forwardWhat are the reasons that highly profitable firms use debt financing? 1 they have sufficient financing 2. Cost of capital is too high 3. They have a fixed capital structure 4. Investors think their stock price is too high A. 1,2,3, & 4 B. 1 & 2 C. 1,2&4 D. 1,2&3 E. None of abovearrow_forwardWhy does the WACC decrease as a company begins to take on debt and then increase after a certain point?arrow_forward
- In general, debt financing is _______ than equity financing. A firm’s ______ has priority in claiming the company’s assets. Question 17 options: 1) less costly, shareholders 2) less costly, lender 3) more costly, shareholders 4) more costly, lenderarrow_forwardThe difference between equity financing and debt financing is that A. equity financing involves borrowing money. B. equity financing involves selling part of the company. C. debt financing involves selling part of the company. D. debt financing means the company has no debt.arrow_forwardSelect all that are true with respect to the cost of debt. Group of answer choices it is the return the firm needs to earn overall to satisfy all investors It is the rate the debt holders demand given the risk they face as debt holders Can be estimated using CAPM Cannot be estimated using CAPM because CAPM is used for estimating the cost of equity Is always equal to the YTM on a company's existing bonds Is lower than the YTM on a company's existing debt if there is default risk Can be proxied by the YTM on a company's existing debt if the debt is risk free Flag question: Question 7arrow_forward
- The cost of is highest for firms that are likely to have profitable future growth opportunities requiring large investments. debt covenants asset substitution debt maturity debt overhangarrow_forwardExplain how continuous reliance on debt financing will affect the return to the equity holders or shareholders of your company following the arguments of M&M proposition 2arrow_forwardIdentify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. a. Large payments of par value are made at maturity. b. Unlike equity, bonds do not affect ownership of a company. C. A business earns a lower return with the funds from the bond than it pays in interest. d. A business earns a higher return with the funds from the bond than it pays in interest. e. Requires payments of interest even when cash flows are low. f. Bond interest payments reduce total taxes paid.arrow_forward
- Why is long term debt the only financing activity? What about current debt, dividends, and current stock?arrow_forwardDiscussionarrow_forwardWhich of the following is an advantage of debt financing? a. Excessive debt increases the risk of equity holders and therefore depresses share price. b. The obligation is generally fixed in terms of interest and principal payments. c. Interest and principal obligations must be paid regardless of the economic position of the firm. d. Debt agreements contain covenants.arrow_forward
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