/hich of the following statements most accurately characterizes the pecking order theory of capital structure? O Regardless of how the firm is financed, the overall value of the firm and aggregate value of the claims issued to finance remain the same. O Firms will seek to use debt financing up to the point that the value of the tax shield benefit is outweighed by the costs of financial distress. O There may be economies of scale in issuing debt securities. O Firms have a preference ordering for capital sources, preferring internally-generated equity first, new debt capital second, and externally-sourced equity as a last re

/hich of the following statements most accurately characterizes the pecking order theory of capital structure? O Regardless of how the firm is financed, the overall value of the firm and aggregate value of the claims issued to finance remain the same. O Firms will seek to use debt financing up to the point that the value of the tax shield benefit is outweighed by the costs of financial distress. O There may be economies of scale in issuing debt securities. O Firms have a preference ordering for capital sources, preferring internally-generated equity first, new debt capital second, and externally-sourced equity as a last re

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 2QE

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According to the capital structure trade-off model: O a. The optimal capital structure minimizes the company's weighted average cost of capital. O b. There is no optimal capital structure, but instead there is a hierarchy of sources of capital. O c. There is no optimal capital structure, and companies should aim to maximize debt financing, since they thereby minimize their tax payments. O d. The optimal capital structure minimizes the company's market value. O e. The optimal capital structure minimizes the company's cost of equity.
Which of the following statements is most correct? Group of answer choices The optimal capital structure maximizes the WACC. None of these. Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing. If the after-tax cost of equity financing exceeds the after-tax cost of debt financing, firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.
Consider two firms that are alike in every way except that Firm A has fixed rate debt in its capital structure and Firm B has variable rate debt. Which firm has riskier equity? Why?
Which statement about capital structure is the most correct? a. The more the company borrows, the lower will be the after-tax WACC. This increases the present value of the firm free cash flows which represents the value of the levered firm. Therefore, a firm should always seek to borrow as much debt as possible. b. The more the company borrows, the higher will be its tax shields, therefore a company will always prefer to issue debt than equity. c. Because the cost of debt is cheaper than the cost of equity, a company should use as much debt as possible to finance their projects d. Lenders rank ahead of shareholders when the company goes bankrupt. This increased risk for shareholders means the cost of equity is higher than the cost of debt. e. A company should always try to reduce its debt because of the high bankruptcy risk associated with debt. A company should aim to have 100% equity financing if it is possible.
A firm's cost of capital indicates [Select] A firm must earn [Select] provided. the risk of the firm's assets. to compensate investors for the financing they hav The required return for a firm is the same as [Select]
Which of the below statements does the MM Proposition I predict? A. In a perfect market, the value of a firm is independent of its capital structure B.In a perfect market, the discount rate depends on the capital structure C.In a perfect market, the value of a firm decreases in leverage D.In a perfect market, the NPY of investments depends on the existing debt/equity mix
The Modigliani and Miller theories are based on several unrealistic assumptions about debt financing. In reality, there are costs, taxes, and other factors associated with debt financing. These costs or effects have led to several theories that explain the impact of these factors on the capital structure of a firm. Based on your understanding of the trade-off theory, what kind of firms are likely to use more leverage? Firms with a higher proportion of fixed-versus-variable costs Firms with a higher proportion of variable-versus-fixed costs Based on your understanding of the capital structure theories, identify the best option for the missing part of the statement. According to signalling theory, if managers expect the firm's stock price to decrease, they are ???? to raise capital through equity financing. Discouraged Encouraged According to the windows of opportunity theory, managers ???? in efficient markets. O Don't believe Believe Under the pecking-order hypothesis, a firm will…
Which of the following statement is correct? O A. Firms that do not take on debt as part of their capital structure are known as leveraged firms. O B. Pecking order theory implies that profitable company will have more debt capacity. OC. According to pecking order theory, firms prefer external financing first. O D. The greater amount of debt carried by a firm, the lesser chance of bankruptcy.
The optimal capital structure for firms in stable industries can reasonably contain ________________ than firms in volatile industries. Select one: A. more debt B. less debt C. an equal amount of debt D. There is no relationship between the cyclical nature of an industry and optimal capital structure
The pecking order theory of capital structure suggests that managers will choose to utilise retained earnings before issuing additional debt when financing new projects. Does that imply anything about the flotation costs of issuing new securities?
How does the WACC DCF methodology mechanically incorporate interest tax shields (select the best answer)? Group of answer choices By estimating free cash flows that incorporate the tax benefits of debt. By adding the tax benefits of interest payments to the value of the firm. By adding the PV of the interest tax shields to the value of the firm. By estimating a discount rate that incorporates the tax benefits of debt.
How many statements below are correct about the Modigliani-Miller theorem? i. The theorem is not an exact description of reality. ii. The theorem provides a benchmark to understand how the capital structure could affect WACC. iii. The theorem implies that firms have benefited from financing with debt due to a higher required rate of return on debt compared with equity. iv. The value of the firm is not affected by its capital structure under any assumptions.