Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 16, Problem 3CQ
Summary Introduction
To determine: Whether the given information is true or false.
Statement:
In the real world when there are no taxes, no expenses of fiscal distress, and no transaction cost reasonable borrowing will not raise the necessary return on a company’s equity.
Introduction:
Modigliani-Miller theory:
Professors Modigliani and Miller made a research on capital structure theory very intensely. From the analysis, it is found that they formed a capital structure irrelevant proposal.
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Consider the trade-off theory of capital structure and the market timing theory in answering this question. A company can borrow at a favourable rate due to low interest rates but chooses not to do so due to the increased financial risk. Instead, it issues equity, despite the market not valuing its equity in excess of the company’s internal valuation.
Required:
Discuss which of the two abovementioned theories prevailed and provide a motivation for your answer.
Is this statement true or false? Please explain in detail
As debt-financing is usually cheaper than equity financing, debt-financing will lower risk for transnational company.
Which statement is most correct? *
A. Since debt financing raises the firm’s financial risk, increasing debt ratio will increase WACC.
B. Since debt financing is cheaper than equity financing, increasing debt ratio will reduce WACC.
C. Increasing a firm’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the firm’s WACC.
D. Statements a and c are correct.
E. None of the above
Chapter 16 Solutions
Corporate Finance
Ch. 16 - MM Assumptions List the three assumptions that lie...Ch. 16 - Prob. 2CQCh. 16 - Prob. 3CQCh. 16 - MM Propositions What is the quirk in the tax code...Ch. 16 - Prob. 5CQCh. 16 - Prob. 6CQCh. 16 - Optimal Capital Structure Is there an easily...Ch. 16 - Financial Leverage Why is the use of debt...Ch. 16 - Homemade Leverage What is homemade leverage?Ch. 16 - Capital Structure Goal What is the basic goal of...
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