Much capital structure theory focusses upon minimising agency costs, taxes, and bankruptcy costs. It what situations might this strategy arguably not bein the long-term interests of capital providers?) If it is a systemically important industries that require state bailouts to survive(i) Paying less tax increases the cost of capital.() f it damages the company's reputation among employees and customers

capital structure theory says that for any company or investment there is an optimal mix of debt and…

Answered: Much capital structure theory focusses…

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter13: Valuation: Earnings-based Approach

Section: Chapter Questions

Problem 8QE

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A negative effect of the increase in debt in the capital structure to control the agency problem can be: Select one: O a. the excessive payment of corporate taxes due to the high interest on the debt. O b. the excessive investment of managers in projects even with a low NPV. O c. resulting in very high risk aversion in management, leading to little or almost no investment in capital projects, even with positive NPVS. This would cause stagnation or little growth of the firm. O d. a wrong signal that the firm is spreading the firm's risk among more shareholders.
Which of the following statements is correct? a. As Modigliani and Miller made clear in their original work, capital structure does not matter in perfect capital markets. Thus, if capital structure does matter, then it must stem from a market imperfection. b. Because corporations pay taxes on their profits after interest payments are deducted, interest expenses increase the amount of corporate tax firms must pay. c. To determine the loss due the leverage for the value of the firm, we must compute the present value of the stream of future interest tax shields the firm will receive minus the stream of future dividends. d. By increasing the amount paid to debt holders through interest payments, the amount of the pre-tax cash flows that must be paid as taxes increases. e. In general, the gain to lenders from the tax deductibility of interest payments is referred to as the interest tax benefit.
Which of the following contentions concerning the static trade off theory of capital structure are true? (i) The optimal capital structure depends upon both the value of the tax shield and on the costs of financial distress. (ii) Costs of financial distress decrease as the amount of debt in the capital structure increases. (iii) The value of the tax shield increases as the amount of debt in the capital structure decreases. (iv) The cost of financial distress does not depend upon the nature of the firm's assets. O Only (i) and (iv) are true. O Only (iv) is true. O Only (i) is true. None are true. O Only (ii) and (iii) are true.
Which of the following statements is CORRECT? * Assume a corporation has less debt than what is ideal. Increasing the use of debt to reach its optimum capital structure would lower the cost of both debt and equity financing. There is no reason to believe that changes in the personal tax rate will have an effect on firms' capital structure decisions. Assuming everything else is equal, a firm with high business risk is more likely to increase the use of financial leverage than a firm with low business risk. In general, a company with low operating leverage has a small percentage of its total costs in the form of fixed costs. If a company's after-tax cost of equity exceeds its after-tax cost of debt, it can still lower its WACC by using more debt.
B) Analyze why, despite employing various investment appraisal techniques, large investment projects in big corporations may fail to deliver their estimated cash flows. Critically assess how a failed capital project may affect key stakeholders and shareholder value, and also shape the future strategy of investment capital.
Are there firms not subject to the capital market constraint? What types of firms/organizations are these? Can large corporations not be tied to capital markets? Don't answer by pen paper plz
Which of the following is most consistent with using debt to reduce agency costs or conflicts? Question 11 options: Increasing debt reduces a firm’s business risk The interest paid on debt reduces taxable income and income taxes The interest paid on debt reduces cash that management of a firm might otherwise waste or use poorly The issuance of debt helps firms increase their credit rating
If the present value of a firm’s marginal financial distress costs are less than the present value of its marginal tax shield, the company Select one: a. has too much debt in its capital structure b. should increase the amount of debt in its capital structure c. has an optimal capital structure d. should increase the amount of equity in its capital structure e. none of the above
Securitization has its upside (primarily liquidity and diversification), but it has its downside as well. Which of the following are potential downsides to securitization? Choose the best answer. Select one: Tax-avoidance and regulatory-avoidance Non-transparency Agency costs All of the above
1)-What is the difference between the “Organic View” and the “Mechanistic View” of government? What are the three (3) Foundation questions of Public Finance? Completely describe an "Efficiency Loss.” What is the Laffer curve and why is it an inappropriate example of Efficiency Loss? When the government does intervene, why is a subsidy of the private market simultaneously a good and bad idea? What is an example of a Direct Effect in Public Finance? What is an Indirect Effect on Public Finance? What is Asymmetrical Information and how does it affect Public Finance? 2)What is the difference between Absolute and Relative prices? What is the Income Consumption Curve, and how is it used to distinguish between normal and inferior goods? How is Income elasticity different from Price Elasticity? How can you show how a change in the price of one Good with no change in Income leads to the Substitution Effect? Considering individual preferences as well as income and prices, how can Consumer…
Because corporations do not actually raise any funds in markets, they are less important to the economy than primary markets. Comment
“Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets.” Comment.

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