Holding everything else constant, an increase in cash will decrease Omay increase or decrease O will increase I will have no impact on a firm's net debt.
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- "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. Falseof stion According to MM Case II, if the expected return on assets decreases, what happens to the expected return on equity? Select one: Oa increases O b. remains constant Oc decreases O d. depends on the firm's capital structure Time le3.If the interest rate on debt is lower than ROA, then a firm will __________ by increasing the useof debt in the capital structure.a. increase the ROE b. not change the ROE c. decrease the ROEd. change the ROE in an indeterminable manner e. none of the above
- In the MM model, as the proportion of debt in the capital structure increases, the cost of equity a. increases. b. decreases. c. remains unchanged; there is no relationship between the two. d. initially rises rapidly, then increases slowly beyond some point.2. 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.How would each of the following scenarios affect a firm’s cost of debt, kd(1 – T); its cost of equity ke and its WACC? Indicate with a plus sign (+), a minus (-) or a zero if the factor would raise, would lower or would have indeterminate effect on the item in question. Assume for each answer that other things are held constant even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer.
- According to MM propositions, which of the following statements best describes the consequence of decreasing debt-to-value ratio for a firm? O The cost of equity capital decreases. O The weighted average cost of capital decreases. O The weighted average cost of capital must not stay constant. O The weighted average cost of capital increases.A firm cannot maintain a return on common equity less than the required rate of return and stay in business indefinitely. True OR False ???Which of the following is true regarding a company assuming more debt? Select one: a. Assuming more debt is always bad for the company b. Assuming more debt reduces leverage c. Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds d. Assuming more debt is always good for the company
- Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?Why does the WACC decrease as a firm begins to take on debt and then increase after a certain point?How would each of the following scenarios affect a firm's cost of debt, ra(1-T); its cost of equity, s; and its WACC? Indicate with a plus (+), a minus (-), or a zero (0) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion. Probable Effect on ra(1-T) WACC rs a. The corporate tax rate is lowered. b. The Federal Reserve tightens credit. c. The firm uses me debt; that is, it increases its debt ratio. The dividend payout ratio is increased The firm doubles the amount of capital it raises during the year. е. The firm expands into a risky new area. f. The firm merges with another firm whose earnings g. are countercyclical both to those of the first firm and to…