Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 16, Problem 11P
Summary Introduction
To determine: The costs for the given situation.
Introduction:
Costs include both direct and indirect costs that are imposed on a firm and its investors. In case of bankruptcy, it imposes both indirect and direct cost. This assumption is ignored by perfect capital market.
Cash flow is the amount of inflows and outflows of cash and cash equivalents that is transferred in and out of the business.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The Nobel Prize-winning Modigliani & Miller Theory states that a firm’s capital structure does not matter. It is based on three key assumptions:
No income taxes
Equal borrowing cost- individuals can borrow at the same interest rate as corporations.
Perfect markets: There are no bankruptcy, transaction, contracting, or agency costs.
Are these assumptions reasonable?
What are the implications if the assumptions do not hold?
Which of the following makes this a true statement? In this slightly more realistic world with corporate taxes, managers can:
Multiple Choice
maximize the firm's value by taking on as much equity as possible.
maximize the firm's value by taking on as much debt as possible.
minimize the firm's value by taking on as much debt as possible.
maximize the firm's value by financing only with debt.
Please listen to the TedTalk below, which describes how corporations like Amazon use tax loopholes to avoid paying taxes
The Bizarre Economics of Tax Havens and Pirate Banking
Discuss one of the questions below:
How could tax loopholes become close to tax evasion?
What are some of the most popular tax loopholes used by corporations?
In your opinion, what is the reason for the rise of 'tax shaming' for corporations like Amazon, Apple, Facebook, Starbucks, and Google?
Chapter 16 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 16.1 - Prob. 1CCCh. 16.1 - Does the risk of default reduce the value of the...Ch. 16.2 - If a firm files for bankruptcy under Chapter 11 of...Ch. 16.2 - Why are the losses of debt holders whose claims...Ch. 16.3 - Prob. 1CCCh. 16.3 - True or False: If bankruptcy costs are only...Ch. 16.4 - Prob. 1CCCh. 16.4 - According to the trade-off theory, all else being...Ch. 16.5 - Prob. 1CCCh. 16.5 - Why would debt holders desire covenants that...
Ch. 16.6 - Prob. 1CCCh. 16.6 - Prob. 2CCCh. 16.7 - Coca-Cola Enterprises is almost 50% debt financed...Ch. 16.7 - Why would a firm with excessive leverage not...Ch. 16.7 - Describe how management entrenchment can affect...Ch. 16.8 - How does asymmetric information explain the...Ch. 16.8 - Prob. 2CCCh. 16.9 - Prob. 1CCCh. 16.9 - Prob. 2CCCh. 16 - Gladstone Corporation is about to launch a new...Ch. 16 - Baruk Industries has no cash and a debt obligation...Ch. 16 - When a firm defaults on its debt, debt holders...Ch. 16 - Prob. 4PCh. 16 - Prob. 5PCh. 16 - Suppose Tefco Corp. has a value of 100 million if...Ch. 16 - You have received two job offers. Firm A offers to...Ch. 16 - As in Problem 1, Gladstone Corporation is about to...Ch. 16 - Kohwe Corporation plans to issue equity to raise...Ch. 16 - Prob. 10PCh. 16 - Prob. 11PCh. 16 - Hawar International is a shipping firm with a...Ch. 16 - Your firm is considering issuing one-year debt,...Ch. 16 - Marpor Industries has no debt and expects to...Ch. 16 - Real estate purchases are often financed with at...Ch. 16 - On May 14, 2008, General Motors paid a dividend of...Ch. 16 - Prob. 17PCh. 16 - Consider a firm whose only asset is a plot of...Ch. 16 - Prob. 19PCh. 16 - Prob. 20PCh. 16 - Prob. 21PCh. 16 - Consider the setting of Problem 21 , and suppose...Ch. 16 - Consider the setting of Problems 21 and 22, and...Ch. 16 - You own your own firm, and you want to raise 30...Ch. 16 - Empire Industries forecasts net income this coming...Ch. 16 - Ralston Enterprises has assets that will have a...Ch. 16 - Prob. 27PCh. 16 - If it is managed efficiently, Remel Inc. will have...Ch. 16 - Which of the following industries have low optimal...Ch. 16 - According to the managerial entrenchment theory,...Ch. 16 - Info Systems Technology (IST) manufactures...Ch. 16 - Prob. 32PCh. 16 - Prob. 33P
Knowledge Booster
Similar questions
- In certain scenerios, some companies may choose to finance with a bank loan specifically because of the deductibility of interest. It could lower their taxable income enough (assuming it is not a corporation at the current 21% flat rate) to put them in a lower tax bracket. This means they could end up paying less money after interest and taxes are paid. It is interesting that bank interest could be utilized as a cash flow strategy! Do you think this is something many finance managers may consider?arrow_forward5. We understand that the cheaper option in raising money for the company is to issue equity rather than debt. However all the current shareholders are reluctant to invest more money into the company. The cost of debt is high and Carlo cannot find us a competitive rate of interest. Is there in your view any alternative options we should consider. We are open to consider anything as we do not want to be personally liable if things go wrong. What rule should be used here.arrow_forwardDavid Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: d. Suppose that Firms U and L have the same input values as in Part c except for debt of 980,000. Also, both firms have total net operating capital of 2,000,000 and both firms are expected to grow at a constant rate of 7%. (Assume that the EBIT in part c is expected at t = 1.) Use the compressed adjusted present value (APV) model to estimate the value of U and L. Also estimate the levered cost of equity and the weighted average cost of capital.arrow_forward
- David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: Now assume that Firms L and U are both subject to a 25% corporate tax rate. Using the data given in part b, repeat the analysis called for in parts b(1) and b(2) using assumptions from the MM model with taxes.arrow_forwardWhich of the following is most consistent with using debt to reduce agency costs or conflicts? Question 11 options: Increasing debt reduces a firm’s business risk The interest paid on debt reduces taxable income and income taxes The interest paid on debt reduces cash that management of a firm might otherwise waste or use poorly The issuance of debt helps firms increase their credit ratingarrow_forwardAn analyst at a company notes that its cost of debt is far below that of equity. He concludes that it is important for the firm to maintain the ability to increase its borrowing because if it cannot borrow, it will be forced to use more expensive equity to finance some projects. This might lead it to reject some projects that would have seemed attractive if evaluated at the lower cost of debt. How do you balance the amount of equity and debt? Explain the significance of maintaining the ability to increase borrowing capacity for a company with a lower cost of debt compared to equity. How does this impact project evaluation and investment decisions, and what role does the concept of cost of capital play in such considerations?arrow_forward
- What Are The Consequences That The Multinational Companies Are Facing In Tax Evasion And Tax Avoidance? And What Will Be The Accomplishment Of These Problems. Answer should be long explanation step by step. Elaborate answer need.No copy from google Urgent needarrow_forward16. Despite the tax benefit of debt, a firm may refrain from using only debt financing, A. because a large amount of debt potentially creates significant bankruptcy costs B. because the firm only has modest operating incomes C. if stock investors do not face personal tax, but investors in firms' debt face a personal tax rate equal to the corporate tax rate. D. all of the abovearrow_forwardWhich explanation BEST describes John Maynard Keynes' "The Paradox of Thrift?" a. Individuals should reduce spending to cut debt. b. When an individual reduces her or his own spending, he or she reduces someone else's revenue. C. Individuals should borrow money during uncertain economic times. d. Individuals should only borrow money when times are good.arrow_forward
- A company is a victim of a \\( \\$ 414 \\) million fraud. At that time its profit margin is \\( 10 \\% \\). How much additional revenue should the company generate in order to recover net income? a. \\( \\$ 41.4 \\) million b. \\( \\$ 414 \\) million c. \\(\\$ 4.14 \\) billion d. \\( \\$ 41.4 \\) billionarrow_forwarddebt can bo soon as a remedy for agency costs and -problems, and therefore create value in companies. However, in certain circumstances debt can also be responsible for aggravating agency problems, and load to value destruction in companies. Please explain and discuss this statement.arrow_forwardWhich of the following statements are incorrect regarding how much debt a company should borrow? Choose all that apply. Question 9 options: A As long as the company can generate higher returns on its new projects than its borrowing interest rate, borrowing more debt will enhance the company's ROE. B Borrowing more debt will increase a company's distress level. C The bigger the company, the more it should borrow D Debt is considered a more expensive capital source.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Business/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:Cengage
Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT
Business/Professional Ethics Directors/Executives...
Accounting
ISBN:9781337485913
Author:BROOKS
Publisher:Cengage
Individual Income Taxes
Accounting
ISBN:9780357109731
Author:Hoffman
Publisher:CENGAGE LEARNING - CONSIGNMENT