PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Textbook Question
Chapter 18, Problem 11PS
Financial slack For what kinds of companies is financial slack most valuable? Are there situations in which financial slack should be reduced by borrowing and paying out the proceeds to the stockholders? Explain.
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Students have asked these similar questions
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.
Financial slack is the amount of unused access to debt markets or bank financing. Which theory of capital structure would place the highest value on maintaining financial slack for a firm that is not in financial distress?
Question 10 options:
a)
Trade-off theory
b)
Debt financing as a managerial constraint
c)
Pecking order theory
d)
Modigliani & Miller irrelevance theory
Financial leverage is the degree to which a firm or individual utilizes .
A. borrowed money to pay wages
B. borrowed money to pay dividends
C. borrowed money to magnify equity earnings
D. borrowed money to diminish equity earnings
Chapter 18 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Here are book and market value balance...Ch. 18 - Prob. 3PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Financial distress This question tests your...Ch. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Prob. 9PSCh. 18 - Pecking-order theory Fill in the blanks: According...
Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Suppose that Congress sets the top...Ch. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Prob. 20PSCh. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 25PSCh. 18 - Trade-off theory The trade-off theory relies on...
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- If a company is worried about having enough cash to pay interest to their bondholders, rent to their landlords and wages to their employees. they are having:a. Solvency issuesb. Liquidity issuesc. Duration matching issuesarrow_forwardWhat is the difference between a financial crisis and a company crisis. Explain.arrow_forwardIs it better to finance a company thru debt or thru equity? Why? What are the downside and upside to each?arrow_forward
- Suppose managers of a firm know that the company is approaching financial distress. Should the managers borrow from creditors and issue a large one-time dividend to shareholders? How might creditors control this potential transfer of wealth?arrow_forwardA company’s dividend policy can also be affected by factors internal to the organization and by the external (macroeconomic) environment in which the business operates. In the table that follows, identify which factors, in general, tend to favor high or low dividend payout ratios. Factor Favors a High Payout Favors a Low Payout A company has a large retained earnings balance on its balance sheet but has very little cash and almost no other liquid assets. A company has an established credit line that it can access when it needs an external source of funding. A closely held firm has a majority of its shareholders in high marginal tax brackets. Each factor higher or lower payout Having the ability to accelerate or delay projects makes it easier or harder for a firm to adhere to a stable dividend policy. If management is concerned with keeping control of the company, it will be likely to retain more or less earnings than…arrow_forwardQuestion Financial leverage is the degree to which a firm or individual utilizes . A. borrowed money to pay wages B. borrowed money to pay dividends C. borrowed money to magnify equity earnings D. borrowed money to diminish equity earningsarrow_forward
- What are the risk implications/shortcomings of financial institutions in increasing their financial leverage to increase return on equity?arrow_forwardWhich of the following is most consistent with using debt to reduce agency costs or conflicts? Question 11 options: Increasing debt reduces a firm’s business risk The interest paid on debt reduces taxable income and income taxes The interest paid on debt reduces cash that management of a firm might otherwise waste or use poorly The issuance of debt helps firms increase their credit ratingarrow_forwardHow banks can improve their return on equity and what are its negative externalities.arrow_forward
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