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“Having zero debt in the firm’s capital structure is not an ideal scenario.” Do you agree with
this statement? Explain
Step by step
Solved in 3 steps
- Why do most analysts recommend against having a capital structure of zero debt?Which of the following statements is FALSE? A. Equity cost of capital is normally higher then cost of debt, thus cost of debt can be examined in isolation. B. No matter if a firm is unlevered or levered, there is no difference in the market value of the firms total securities and market value of the firm’s assets. C. Introducing debt increases the risk even though it may be cheap and consequently increases firms equity cost of capital. D. Cost of Capital of equity and Leverage can be explicitly explained by first proposition that Modigliani and Miller introduced.Which of the following statement is false? a. None of above b. The capital structure should be flexible. c. A firm having operating loss would find it worthwhile to incorporate debt in the capital structure in a greater measure. d. The use of excessive debt threatens the solvency of the company.
- Why might it be rational for a small firm that does not have access to the capital markets touse the payback method rather than the NPV method?"Homemade leverage is just a theoretical exposition, it doesn't tell you anything about the real relationship between capital structure and the value of the firm". Do you agree or disagree with this statement? Why?"If the firm's ROE is too low, the firm's debt ratio must be too low." True or false? Select one: O a. True O b. False
- Koffman Corporation is trying to raise capital. What method would be the least risky to raise capital if it has a less-than-favorable credit rating?1.Why the limitation of portfilio analysis is it naively following the prescriptions of a portfolio model may actually reduce corporate profits if they are used inappropriately?5.(True or False) Risk shifting refers to a situation in which management of a firm with risky debt cannot fund a positive NPV project with equity because equityholders understand that some of the returns of the positive NPV project go to debtholders
- Critique this statement: “The use of debt financing lowers the net income of the firm, and hence debt financing should be used only as a last resort.”The Nobel Prize-winning Modigliani & Miller Theory states that a firm’s capital structure does not matter. It is based on three key assumptions: No income taxes Equal borrowing cost- individuals can borrow at the same interest rate as corporations. Perfect markets: There are no bankruptcy, transaction, contracting, or agency costs. Are these assumptions reasonable? What are the implications if the assumptions do not hold?Kidman corporation is trying to raise capital. What method would be the least risky to raise capital if it has a less-than-favorable credit rating?