18. Which of the following statements is true?A.Payment on interest on debt is considered an expense,while payment of dividends is a return on capital.B.Unpaid common stock dividends can result inliquidation of the firm.C.One of the costs of issuing equity is the possibility offinancial distress, while no financial distress is associated withdebt.19. In the real world with the presence of corporate taxation,MM Proposition I that VL- Vu does not hold because:A. levered firms pay less taxes compared with identicalunlevered firms.B. bondholders require higher rates of return compared withstockholders.C. dividends are no longer relevant with taxes.20. AI Robotics Company will earn $120 in one year if it doeswell. The debtholders are promised payments of $80 in oneyear if the firm does well. If the firm does poorly, expectedearnings in one year will be $20 and the repayment todebtholders will only be $10 because of financial distress cost.The probability of the firm performing well is 60%. Ifbondholders are fully aware of these costs, what will thedebtholders pay for the debt? The interest rate on the bonds is7%.A. $35.51B. $38.00C. $48.59

Please note that under the answering guidelines only 1 question can be solved. Since multiple…

18. Which of the following statements is true? A. Payment on interest on debt is considered an expense, while payment of dividends is a return on capital. B. Unpaid common stock dividends can result in liquidation of the firm. C. One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.

18. Which of the following statements is true? A. Payment on interest on debt is considered an expense, while payment of dividends is a return on capital. B. Unpaid common stock dividends can result in liquidation of the firm. C. One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.

SWFT Corp Partner Estates Trusts

42nd Edition

ISBN:9780357161548

Author:Raabe

Publisher:Raabe

Chapter4: Corporations: Organization And Capital Structure

Section: Chapter Questions

Problem 14DQ

See similar textbooks

Similar questions

The following are the assumptions of the Modigliani and Miller approach, EXCEPT A. Investors think logicallyB. Dividends are fully declaredC. Capital Markets are PerfectD. No corporate taxes exist
QA) State whether the following statements are true or false Within Corporation, one key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value. Money markets are markets for short-term debt securities. Negative net operating cash flow of firm means that the firm has solvency.
Which one of the following statements is TRUE? a. Creditors have a claim on a firm's earning stream through the dividend payments they receive. b. One tool of corporate governance is a company's tax avoidance strategy. c. One tool of corporate governance is stock repurchases. d. One tool of corporate governance is how the company's charter affects the likelihood of a takeover. e. One tool of corporate governance is choosing a good investment banker.
Which of the following statements is CORRECT? * Assume a corporation has less debt than what is ideal. Increasing the use of debt to reach its optimum capital structure would lower the cost of both debt and equity financing. There is no reason to believe that changes in the personal tax rate will have an effect on firms' capital structure decisions. Assuming everything else is equal, a firm with high business risk is more likely to increase the use of financial leverage than a firm with low business risk. In general, a company with low operating leverage has a small percentage of its total costs in the form of fixed costs. If a company's after-tax cost of equity exceeds its after-tax cost of debt, it can still lower its WACC by using more debt.
Please answer the following follow up questions Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. d) The higher the proportion of equity in a company’s overall capital structure, thehigher return required by its debtholders. (Explain your reasoning – in yourexplanation, provide a numerical example supporting your answer.) e) In the presence of corporate taxes, a company would prefer to raise debt onlywhen the benefits of the tax shield fully offset the cost of debt. (Explain yourreasoning – in your explanation, provide a numerical example supporting youranswer.) f) 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 yourreasoning – in your explanation, provide a numerical example supporting youranswer.)
‏.......theory would deduce that corporate growth causes an increase in shareholder remittance . Select one : a . Agency Theory b . Normative Accounting c . None of the other Points d . Positive Accounting
Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. a) The higher the proportion of equity in a company’s overall capital structure, thehigher return required by its debtholders. (Explain your reasoning – provide a numerical example supporting your answer.) b) In the presence of corporate taxes, a company would prefer to raise debt onlywhen the benefits of the tax shield fully offset the cost of debt. (Explain yourreasoning – provide a numerical example supporting youranswer.) 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. (Explain yourreasoning –, provide a numerical example supporting youranswer.)
Which of the following is NOT a conclusion drawn from M&M's Propositions 1 and 2? a. Shareholder's required return rises with leverage. b. The WACC does not change as capital structure change. c. Firm value is determined by the left hand of the balance sheet the firm's assets, and the cash flow generated by them. d. The WACC is determined by the riskiness of the company's business (assets). e. A firm can change its market value by splitting its cash flows into different streams.
47. The ultimate objective of a business is to maximize wealth of shareholders. Along with that it also _________. a. Increases the risk b. Reduces the return c. Increases the tax d. Reduces the risk
Which of the following statements is correct? a. As Modigliani and Miller made clear in their original work, capital structure does not matter in perfect capital markets. Thus, if capital structure does matter, then it must stem from a market imperfection. b. Because corporations pay taxes on their profits after interest payments are deducted, interest expenses increase the amount of corporate tax firms must pay. c. To determine the loss due the leverage for the value of the firm, we must compute the present value of the stream of future interest tax shields the firm will receive minus the stream of future dividends. d. By increasing the amount paid to debt holders through interest payments, the amount of the pre-tax cash flows that must be paid as taxes increases. e. In general, the gain to lenders from the tax deductibility of interest payments is referred to as the interest tax benefit.
The corporate valuation model cannot be used unless a company pays dividends. a. True b. False
Assume a M&M frictionless world EXCEPT that there are Corporate level taxes only. Under these assumptions, capital structure is irrelevant in that changing capital structure has no impact on the value of the firm. Group of answer choices True False