Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 15, Problem 9CQ
Long-Term Financing As was mentioned in the chapter, new equity issues are generally only a small portion of all new issues. At the same time, companies continue to issue new debt. Why do companies tend to issue little new equity but continue to issue new debt?
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Which of the following is a disadvantage of long-term debt as a means of company financing?
Group of answer choices
Debtholders have preferential status in the event of a company being wound up.
Tax relief is available on interest payments.
Debt is often quicker to arrange compared to equity.
The amount and timing of interest payments is predictable, making budgeting easier.
5.What is the major drawback of debt financing?
Select one:
You have to pay back the money
Increasing debt changes the gearing ratio of the firm
Interest payments must be made before shareholder dividends and irrespective of fluctuations in profits
Lenders often require security of the loan against assets of the company
There are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing?
a.
The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest
b.
The repayment of debt capital may affect the liquidity of the company
c.
If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets
d.
The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares
e.
Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the company
Chapter 15 Solutions
Corporate Finance
Ch. 15 - Bond Features What are the main features of a...Ch. 15 - Prob. 2CQCh. 15 - Preferred Stock Preferred stock doesnt offer a...Ch. 15 - Preferred Stock and Bond Yields The yields on...Ch. 15 - Prob. 5CQCh. 15 - Call Provisions A company is contemplating a...Ch. 15 - Prob. 7CQCh. 15 - Preferred Stock Do you think preferred stock is...Ch. 15 - Long-Term Financing As was mentioned in the...Ch. 15 - Internal versus External Financing What is the...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Financing with Debt Versus Equity. It is commonly understood that the cost of financing a business’sasset purchases with debt is cheaper than financing those purchases with equity. Discuss why debt financing is cheaper than equity financing. Is there a set of circumstances when the cost of debt financing would exceed the cost of equity financing? If so, when?arrow_forwardWhich 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 companyarrow_forwardWhat are the reasons that highly profitable firms use debt financing? 1 they have sufficient financing 2. Cost of capital is too high 3. They have a fixed capital structure 4. Investors think their stock price is too high A. 1,2,3, & 4 B. 1 & 2 C. 1,2&4 D. 1,2&3 E. None of abovearrow_forward
- Why does the WACC decrease as a company begins to take on debt and then increase after a certain point?arrow_forwardWhy do companies often prefer debt financing to other forms of financing for capitalinvestments?a. Actually, they don't prefer debt financing. They usually try to use retainedearnings for capital investments.b. Because bond holders are happy to just break even on their bonds.c. Because the MARR all but guarantees the projects will return yields greater thanthe interest on the loans.d. Because debt interest is tax deductible, reducing significantly the actual cost ofborrowing money for projects.arrow_forwardIn general, debt financing is _______ than equity financing. A firm’s ______ has priority in claiming the company’s assets. Question 17 options: 1) less costly, shareholders 2) less costly, lender 3) more costly, shareholders 4) more costly, lenderarrow_forward
- The difference between equity financing and debt financing is that Group of answer choices A. equity financing involves borrowing money. B. debt financing involves selling part of the company. C. debt financing means the company has no debt. D. equity financing involves selling part of the company.arrow_forwardThe difference between equity financing and debt financing is that A. equity financing involves borrowing money. B. equity financing involves selling part of the company. C. debt financing involves selling part of the company. D. debt financing means the company has no debt.arrow_forwardSelect all that are true with respect to the cost of debt. Group of answer choices it is the return the firm needs to earn overall to satisfy all investors It is the rate the debt holders demand given the risk they face as debt holders Can be estimated using CAPM Cannot be estimated using CAPM because CAPM is used for estimating the cost of equity Is always equal to the YTM on a company's existing bonds Is lower than the YTM on a company's existing debt if there is default risk Can be proxied by the YTM on a company's existing debt if the debt is risk free Flag question: Question 7arrow_forward
- Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. A company earns a lower return with borrowed funds than it pays in interest.arrow_forwardThe required return on assets will change, if O a. one of the firm's business lines is closed. O b. leverage increases. O C. if the credit rating companies downgrade the firm's corporate debt. O d. if the interest payment to creditors increases.arrow_forwardWhat are the charateristics of Debt financing and Equity fianancing? If a company wanted to maximize EPS (Earning per Share), which form of financing might they likely consider, debt or equity? Explain.arrow_forward
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