Which of the following about optimal capital structure is incorrect? Optimal capital structure is the mixed of debt and equity capital that minimizes the firm’s weighted average cost of capital A company that follows the pecking order theory will use external financing thru debt after exhausting all the possible financing thru equity The management empire-building theory views high interest payments as to prevent management from unreasonable spending A company can take advantage of its high corporate tax rate as tax shield, under the trade-off theory

Which of the following about optimal capital structure is incorrect? Optimal capital structure is the mixed of debt and equity capital that minimizes the firm’s weighted average cost of capital A company that follows the pecking order theory will use external financing thru debt after exhausting all the possible financing thru equity The management empire-building theory views high interest payments as to prevent management from unreasonable spending A company can take advantage of its high corporate tax rate as tax shield, under the trade-off theory

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

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 6QE

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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 is a valid reason for a firm not to use as much debt as it can raise? Group of answer choices The use of more debt is expected to result in an increase in the firmʹs cost of capital when everything is considered More debt will increase the firmʹs riskiness All of them are valid reasons for a firm to use less debt than might be available The use of more debt is expected to result in a lower price/earnings ratio
Which of the followings proposes that there is a tradeoff between level of borrowing and benefit of tax shields up a point after which financial distress costs start kicking in? CAPM Static capital structure theory M&M Proposition I M&M Proposition II Pecking order theory Floation cost includes Gross spread Direct expenses Indirect expenses Abnormal returns All of above Which one of the followings states that the value of a firm is unrelated to the firm's capital structure? Capital Asset Pricing Model M&M Proposition I M&M Proposition II Law of One Price Efficient Markets Hypothesis
Trade off Theory states that Firms should use equal debt and equity in capital structure Firms with higher operating risk should use less debt Firm add leverage when interest rates are low None of the above Firm should use more debt to overcome high par values of stock
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.
When establishing their optimal capital structure, firms should strive to minimize the amount of debt financing used minimize the weighted average cost of capital none of the choices maximize the marginal cost of capital
Which 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 it 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. 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 resort.
Required Calculate the weighted average cost of capital of Gamma plc. Explain Modigliani and Miller’s argument that in a world of no taxes and no bankruptcy the value of the firm does not depend on its capital structure. Explain how a firm's optimal capital structure is determined according to the static theory of capital structure (i.e. the traditional approach).
Which of the following statements is CORRECT? * A company can use its retained earnings without incurring a flotation cost. As a O result, while the cost of retained earnings is not zero, it is usually less expensive than the after-tax cost of debt. The capital structure that minimizes a company's weighted average cost of capital often maximizes its stock price. The capital structure that minimizes the firm's weighted average cost of capital often maximizes its earnings per share. If everything else is stable, and corporate tax rates drops, the Modigliani-Miller tax- adjusted tradeoff principle implies that companies should expand their use of debt. When a corporation learns that the cost of debt is less than the cost of equity, rising the debt ratio would lower the WACC.
Based on M & M with taxes and without taxes, how much time should a financial manager spend analyzing the capital structure of their firm? The bird in hand theory suggests that a company can reduce its cost of equity capital by reducing its dividend payout ratio. Is this so and why? the homemade dividend strategy argues that investors impose their dividend preference on the firm. is this true or false and why
Capital rationing: Select one: O a. assures shareholder wealth maximization. O b. is a way of preserving the assets of the firm over the long term. O c. assures maximum potential profitability. O d. is a less than optimal way to arrive at capital budgeting decisions.
The optimal capital structure: a. Maximizes the value of equity but not the tax shield associated with debtb. Minimizes the tax shield associated with debtc. Maximizes the value of the company but not necessarily the tax shield associated with debtd. Maximizes the value of the company and the tax shield associated with debt