Consider the following statements: The interest tax shield for a firm: I. Is the tax benefit a firm derives from paying interest II. Will decrease as the corporate income tax rate is increased III. Is the yield to maturity on a firm’s bonds multiplied by the market value of the bonds outstanding Which of the statements is true

Consider the following statements: The interest tax shield for a firm: I. Is the tax benefit a firm derives from paying interest II. Will decrease as the corporate income tax rate is increased III. Is the yield to maturity on a firm’s bonds multiplied by the market value of the bonds outstanding Which of the statements is true

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 3Q

See similar textbooks

Similar questions

Consider the following statements: The interest tax shield for a firm: I. Is the tax benefit a firm derives from paying interest II. Will decrease as the corporate income tax rate is increased III. Is the yield to maturity on a firm’s bonds multiplied by the market value of the bonds outstanding Which of the statements is TRUE? a. I only b. II only c.III d. I, II and II only e. None of the above
The after-tax cost of debt capital is equal to the yield to maturity on a corporate bond multiplied by (1 - T). Select one: True O False
Which of the following will increase a firm's aftertax cost of debt financing? Select one: a. increase in a bond's current market price b. decrease in the corporate tax rate c. increase in the dividend yield d. decrease in the market rate of interest
Assume that the return on tax-exempt securities is 0.09 and that tp = 0.3, tg = 0.15, and te = 0.35, where tg is the rate on capital gains, te is the corporate tax rate, and to is the personal tax rate on dividends and interest. Equilibrium conditions exist. a. The return to investors on taxable bonds raised as new capital can be expected to be b. The return to investors on common stock (all capital gains) raised as new capital can be expected to be c. If taxable debt is issued, the company will have to earn before tax, and if common stock is issued the firm will have to earn before tax. d. If taxable debt is issued, the company will have to earn before tax, and if common stock is issued the firm will have to earn before tax.
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.
How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.
How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratio
How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratio 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.
How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.
Which one of the following factors might cause a firm to increase the debt in its financial structure?A. An increase in the corporate income tax rate.B. Increased economic uncertainty.C. An increase in the federal funds rate.D. An increase in the price-earnings ratio.
Identify 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.
What happens to ROE for Firm U and Firm L if EBIT falls to $1,600? What happens if EBIT falls to $1,200? What is the after-tax cost of debt? What does this imply about the impact of leverage on risk and return?