If a firm's marginal tax rate is increased, this means that other things held constant, lower the cost of debt used to calculate its WACC. True False
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If a firm's marginal tax rate is increased, this means that other things held constant, lower the cost of debt used to calculate its WACC.
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- The higher the firm's tax rate, the lower the firm's after-tax cost of debt and WACC will be (other things held constant.) TRUE Or False?According to the trade-off theory, the optimal capital structure is the level of debt that O minimizes the financial distress costs. equates the present values of the incremental interest tax shield and the incremental financial distress costs. maximizes the after-tax cash flows that are internally generated. maximizes the present value of the interest tax shield.If the firm borrows money at a significantly lower rate, this factor affects the firm's MARR. How?
- WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT? A. IF A FIRM'S EXPECTED BASIC EARNING POWER (BEP) IS CONSTANT FOR ALL ITS ASSETS AND EXCEES INTEREST RATE ON ITS DEBT, THEN ADDING ASSETS FINANCING THEM WITH DEBT WILL RAISE THE FIRM'S EXPECTED RATE OF RETURN ON COMMON EQUITY (ROE)? B. THE HIGHER ITS TAX RATE, THE LOWER A FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. C. THE HIGHER THE INTEREST RATE ON ITS DEBT, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. D. THE HIGHER ITS DEBT RATIO, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. E. STATEMENT A IS FALSE, BUT B, C AND D ARE ALL TRUE.and the amount of the debt Present value of a perpetual tax shield will go up if the firm's tax rate decreases; decreases increases; increases decreases; increases increases; decreasesWhich of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.
- Assume that there is corporate tax, but no other frictions. Based on the propositions of Modigliani and Miller, which statement is the least accurate? Oa. The weighted cost of capital decreases as the leverage ratio increases. D. The cost of debt increases as the leverage ratio increases. C. Firm value increases as the firm takes on more debts. d. The cost of equity increases as the leverage ratio increases. O e. The optimal structure is 100% debt.Regarding the trade-off theory, a firm would reach its optimal capital structure if the tax savings from additional leverage are offset by the increased costs of distress. the present value of the tax shield exceeds the value of the all-equity-financed firm. additional borrowing results in lower financial distress costs. additional borrowing is offset by the interest tax shield.How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) 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. rd (1-t) rs WACC 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.
- How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) 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. 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratioHow would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) 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. rd (1-t) rs WACC 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratio 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) 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. rd (1-t) rs WACC 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.