PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 18, Problem 6PS
Tax shields* “The firm can’t use interest tax shields unless it has (taxable) income to shield.” What does this statement imply for debt policy? Explain briefly.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Which of the following is incorrect about debt financing?
A. Debt financing always generates excess returns which benefits equity investors
b. One benefit of debt financing is that interest on most debt is fixed
c. One benefit of debt financing is that interest is a tax deductible expense
d. It increases financial leverage
Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?
A. transaction costs.
B. political risk.
C. differential tax laws.
D. all of the above.
E. none of the above.
1. Which of the following is not a reason for the issuance of long-term liabilities?
a. Debt financing offers an income tax advantage.b. Ownership interest is diluted.c. Debt may be the only available source of funds.d. Debt financing may have a lower cost.
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...
Knowledge Booster
Learn more about
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
- Why should an investor use debt?arrow_forwardDiscuss MM proposition II under the situation when there are corporate taxes and risk-free debt.arrow_forwardIf a firm is interested in the current cost of its debt obligations, then it can simply look at the contractual rate of interest due to lenders on those obligations. True Falsearrow_forward
- How a company takes tax advantage of Bonds Payable (or any other fixed cost financing)?arrow_forwardIdentify 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_forward1. Explain what a unsecured debt, subordinated debt, senior debt is? -is there risk in buying an unsecured debt and subsequently having the corp issue a senior debt? - Which types of debt of these would have the lowest interest rate, the highest?arrow_forward
- Identify the following as either an advantage or a disadvantage of bond financing for a company. a. Bonds do not affect owner control. b. A company earns a lower return with borrowed funds than it pays in interest. c. A company earns a higher return with borrowed funds than it pays in interest. d. Bonds require payment of periodic interest. e. Interest on bonds is tax deductible. f. Bonds require payment of par value at maturity.arrow_forwardWhat is subaggregation clause in sovereign debt restructuring?arrow_forwardWhich of the following statements regarding the private debt market is FALSE? A) Private debt has the advantage that it avoids the cost of registration. B) Bank loans are an example of private debt—debt that is not publicly traded. C) Private debt has the disadvantage of being illiquid. D) The public debt market is larger than the private debt market.arrow_forward
- Which of the following is the risk due to a firm's debt usage? Business risk Financial risk Market risk Interest rate risk Purchasing power risk Exchange rate riskarrow_forwardIdentify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. A company earns a higher return with borrowed funds than it pays in interest.arrow_forwardWhat is informal debt restructuring?arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License