While the use of debt can lower the average cost of capital, there is a point that the debt leverage gets high enough it increases the cost of capital.
Q: If a firm’s ROE is low and management wants to improve it, explain how using more debtmight help.
A: ROE refers to return on equity.It is a measure of profitability of a firm with respect to its…
Q: The principle of gearing 2. Why debt is cheaper than equity 3. What the effect will be on the risk…
A: Gearing is the debt-to-equity relationship or ratio of a firm. Gearing indicates how much of a…
Q: Which of the following statements is FALSE? As debt increases, the risk associated with bankruptcy…
A: Source of raising capital include: Equity financing Debt financing Loans from financial…
Q: why an increase in cost of debt will increase cost of capital associated with business risk and…
A: The cost of capital is the minimal rate of return that a company must earn before it may generate…
Q: Which combination of investment policy and financing policy related to working capital provides the…
A: RELAXED AND CONSERVATIVE Relaxed policy estimates the current assets for achieving the target…
Q: When one uses the after-tax weighted average cost of capital (WACC) to value a levered firm, the…
A: Introduction:- The main use of Weighted average cost of capital is to determine the cost of each…
Q: Do you agree? Why? (a) High levels of working capital decrease risk and decrease return. (b) High…
A: Working capital refers to the measure of the short-term financial health of the company that…
Q: While isolated computation of cost of capital can be done, the computation of WACC can provide a…
A: Cost of capital is used in “capital budgeting” in order to compute the cost of a company’s funds or…
Q: 4. If a higher ROE is desirable, why don't companies take on large amounts of debt? a. Additional…
A: The return on equity is used to evaluate the profit earned on an investment considering the profit…
Q: Which of the following statements are incorrect regarding how much debt a company should borrow?…
A: The company has two types of capital Debt capital and equity capital. Interest on Debt capital…
Q: In determining the optimal weighted average cost of capital, an MNC can never have too much debt.…
A: The Weighted Average Cost of Capital is always post tax. It is calculated with the help of following…
Q: In general, the cost of debt capital is lower than the cost of equity capital. For this reason, it…
A: Generally, it has been observed that the company cost of debt is lower as compared to its equity…
Q: What is opportunity cost and why is it an important concept in the capital budgeting process? The…
A: I am answering the first question as per bartleby guidelines. Please re-submit the remaining…
Q: Using more debt lowers profits and thus the ROA. Why doesn’t debt have the samenegative effect on…
A: Return on Assets (ROA): It is a ratio which states the relation between net income and total assets…
Q: Which of the following is true regarding capital rationing decisions? a. Companies should always…
A: Capital rationing is a strategy to allocate limited capital to different projects which gives the…
Q: The weighted average cost of capital provides the rate of return such that All capital providers…
A: To invest in new project or investment, firm require new funds which will be arranged by different…
Q: Consider the following statements: The traditional view of capital structure with no taxation or…
A: As per traditional view of capital structure, it would be beneficial to take more debt if the…
Q: When agency and bankruptcy costs are considered, the optimal capital structure has a debt level…
A: Capital structure is the distribution of finances of the company in debt and equity.
Q: If a firm's marginal tax rate is increased, this means that other things held constant, lower the…
A: After tax cost of debt = Before tax cost of debt * (1-tax rate)
Q: The goal of the capital budgeting decisions is to select capital projects that will decrease the…
A: Capital budgeting analysis is useful to know which projects are profitable and which are not. There…
Q: When establishing their optimal capital structure, firms should strive to minimize the amount of…
A: The capital structure is said to be optimum capital structure when the firm has selected such a…
Q: Why do most analysts recommend against having a capital structure of zero debt?
A: Capital Structure of a firm is the mix of debt and equity which it uses to finance its operations or…
Q: If the internal rate of return (IRR) is less than the cost of capital, then the investment is…
A: False If the internal rate of return (IRR) is less than the cost of capital, then the investment is…
Q: explain the effect of additional debt on the weighted average cost of capital (WACC)?
A: When the company takes on additional date in its capital structure then it increases the risk of…
Q: If the financial market is frictionless, the cost of equity is higher than the cost of debt in all…
A: A financial market is a place where people may exchange low-cost financial securities and…
Q: Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm…
A: Modigliani and Miller's approach (M&M) states that the valuation of a firm is independent of the…
Q: Consider the trade-off theory of capital structure and the market timing theory in answering this…
A: The capital structure theories are related to the issuing of debt and equity. The ratio between debt…
Q: The main lesson to be learned from the Modigliani and Miller theory of capital structure assuming…
A: Modigliani – Miller theory has following assumptions- There exist a perfect capital market, and…
Q: The cost of debt is normally higher than the cost of equity. Is it a good idea to always carry a…
A: Solution: False, The cost of debt is normally cheaper than the cost of equity.
Q: According to the trade-off theory of capital structure which of the following statements is true…
A: Trade off theory of capital structure state that some cost of bankruptcy that is increse in raising…
Q: the interest rate on debt is lower than ROA, then a firm will __________ by increasing the use of…
A: Solution Return on Equity is a measure of financial performance calculated by dividing net income…
Q: a) – Explain the concept of Tax Deduction in WACC. Does this tax deduction make debt finance Cheaper…
A: Since you have asked multiple question, we will solve the first question for you. If you want any…
Q: key benefits associated with refunding debt are the reduction in the firm's debt ratio and the…
A: The debt ratio is ratio that dictates that how much company has taken the debt out of its total…
Q: True/False. The optimal amount of debt produces the highest weighted average cost of capital. Group…
A: Solution- The optimal amount of the debt produced the highest weighted averagecost of capital.-False
Q: What are the Factors That Complicate Capital Investment Analysis
A: Note: We’ll answer the first question since the exact one wasn’t specified. Please submit a new…
Q: Which of the following statements relating to working capital financing is not correct? A.…
A: 1. A conservative policy uses long-term debt to finance non-current assets. A conservative policy…
Q: There are advantages and disadvantages of debt financing in contrast to equity financing. Which of…
A: Debt financing has less risk as compared to equity financing, which is why the cost of debt is less…
Q: he supply and demand for loans will increase when capital becomes more productive. Select one:…
A: We know the Law of demand and law of supply. As per the Law of Demand if the Interest rate is…
Q: What is a good capital structure? Are low debt ratios always favorable?
A: The capital structure of a corporation is the exact combination of debt and equity used to support…
Q: Having zero debt in the firm’s capital structure is not an ideal scenario.” Do you agree with this…
A: The capital structure is a particular combination of debt and equity used by the company to finance…
Q: should we expect the flotation costs for debt to be significantly lower than those for equity
A: Flotation costs are the expenses incurred by a firm when it issues fresh stock. Flotation costs…
Q: The independence hypothesis is one of the theories explaining a firm's capital structure. Which of…
A: Capital Structure is a mix of source of external funds particularly combination of debt and equity…
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- "We can estimate cost of equity using Capital Asset Pricing Model (CAPM)" True FalseWhat capital budgeting rule is a simple but imperfect attempt to solve the capital rationing problem? a The profitability index b The accounting rate of return c The payback rule d The internal rate of return e The net present value ruleIf the internal rate of return (IRR) is less than the cost of capital, then the investment is acceptable. Group of answer choices True False
- Thinking about the definition of the term "flotation costs," should we expect the flotation costs for debt to be significantly lower than those for equity? Why or why not? how can the answer be supported.What is a good capital structure? Are low debt ratios always favorable?1. Explain briefly on “Relevant Cost & Irrelevant Cost”.2. “What is Financial Leverage”? Explain with appropriate illustration.3. Explain the cocept of “Systematic & Non-Systematic Risk”.4. Why is preference capital considered as a hybrid source of financing?
- Ch. 17. True/False. The optimal amount of debt produces the highest weighted average cost of capital. Group of answer choices True FalseUsing CFO Sheila Dowling’s projected weighted-average-cost of capital (WACC) schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate?What factors can lead to an increasing marginal cost of capital?How might this affect capital budgeting?
- What is opportunity cost and why is it an important concept in the capital budgeting process? The opportunity cost concept applies to almost every financial decision we make as individuals. Can you give an example from your own experience? What is capital rationing from the perspective of capital budgeting? Give an example of a strength and a weakness of the accounting rate of return approach.The supply and demand for loans will increase when capital becomes more productive. Select one: True FalseWhat is capital budgeting? Compare the advantages and disadvantages of various capital budgeting techniques. Do you think NPV is the best decision criterion and it can overcome the problems inherent in other methods? Justify your answer.