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Step by step
Solved in 3 steps
- Suppose interest rates in the economy increase. How would such a change affect the costs of both debt and common equity based on the CAPM?Long-term debt financing can have a possibility of more funding but is more risky in terms of long-term payment of loans. Group of answer choices True FalseThe key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity. true or false explain
- Interest costs for short-term debt are generally lower than interest costs for long-term debt because A. short-term debt is more flexible, allowing a match of short-term needs with short-term financing. B. the term structure of interest rates generally reflects an upward sloping yield curve. C. investors demand higher returns on short-term debt due to liquidity concerns. D. both A and B.The supply and demand for loans will increase when capital becomes more productive. Select one: True False2. The Trade-Off Model A. "The trade-off model of debt financing implies that an increase in the interest rate on debt will cause the level of debt to decline." Do you agree or disagree? Please explain. B. Discuss the likely effects of an increase in uncertainty about cash flows on the responsiveness of a firm's debt level to changes in the interest rate on debt.
- When estimating cost of debt, the firm should not simply use current short-term rates because these rates do not reflect expectations regarding Group of answer choices long-term inflation expansionary monetary policy contractionary monetary policy short-term inflationIf interest rates increase because of a previously unanticipated inflation rate risk? long-lived debt instruments will decline more than short-lived debt instruments long-lived debt instruments will decline less than short-lived debt instruments neither set of debt instruments will decline all other things being equal, both should decline equallyDebt allows an economy to appear very large but debt also creates more ____ in an economy. Inevitability Surety Certainty Risk Business
- When the real rate of interest is less than the nominal rate of interest, then: Multiple Choice inflation must be added to the nominal rate. investment returns do not increase purchasing power. nominal flows should be discounted with real rates. inflation is expected to occur.If the firm borrows money at a significantly lower rate, this factor affects the firm's MARR. How?Is it correct to state that banks’ returns will be higher if interest rates increase? Outline the advantages and drawbacks of Gap analysis and Duration analysis.