Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 15.1, Problem 1CC

With corporate income taxes, explain why a firm’s value can be higher with leverage even though its earnings are lower.

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Which of the following statements is most accurate?   A.   Financial leverage is directly related to operating leverage.   B.   Increasing the corporate tax rate will not affect capital structure decisions.   C.   A firm with low operating leverage has a small proportion of its total costs in fixed costs.   D.   Total costs can be calculated as net income minus total revenue.
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.
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?

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Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book

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