PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 18, Problem 18PS
Summary Introduction
To discuss: The prediction of traditional theory of optimal capital structure about the relationship among the target book debt ratios and book profitability and whether this prediction is constant with its facts.
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Students have asked these similar questions
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
How does the WACC DCF methodology mechanically incorporate interest tax shields (select the best answer)?
Group of answer choices
By estimating free cash flows that incorporate the tax benefits of debt.
By adding the tax benefits of interest payments to the value of the firm.
By adding the PV of the interest tax shields to the value of the firm.
By estimating a discount rate that incorporates the tax benefits of debt.
What is capital rationing? What types of firms might encounter capital rationing?
Chapter 18 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Here are book and market value balance...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Prob. 5PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Prob. 7PSCh. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Bankruptcy costs On February 29, 2019, when PDQ...Ch. 18 - Financial distress This question tests your...
Ch. 18 - Prob. 12PSCh. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 20PSCh. 18 - Pecking-order theory Fill in the blanks: According...Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Financial slack True or false? a. Financial slack...Ch. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 26PSCh. 18 - Trade-off theory The trade-off theory relies on...
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Similar questions
- How does a cost-efficient capital market help reduce the prices of goods and services? Describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding capital. Is an initial public offering an example of a primary or a secondary market transaction? Indicate whether the following instruments are examples of money market or capital market securities. a. US Treasury bills b. Long-term corporate bonds c. Common stocks d. Preferred stocks e. Dealer commercial paper Briefly explain what is meant by the term efficiency continuum.arrow_forwardWhich of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.arrow_forwardConsider 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.arrow_forward
- Which of the following statement are true? Direct transfer of capital involves the aid of investment banks and intermediaries None of the statements are correct Interest rates are likely to decrease when there is an expected increase in inflation Interest rates are likely to grow when companies have declining productive opportunitiesarrow_forwardHow does additional debt in a firm influence its WACC? its free cash flow (FCF)? the agency costs of the firm?arrow_forwardThe pecking order theory of capital structure suggests that managers will choose to utilise retained earnings before issuing additional debt when financing new projects. Does that imply anything about the flotation costs of issuing new securities?arrow_forward
- 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.arrow_forwardDiscuss the usefulness of the DuPont Analysis in analyzing the drivers of companies’ profitability. In your discussion explain the effect of borrowing on the return on common equityarrow_forwardIs it better to finance a company thru debt or thru equity? Why? What are the downside and upside to each?arrow_forward
- Which 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_forwardAccording 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.arrow_forwardWhich 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.arrow_forward
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