If a firm increases its debt to a very high level, then the positive impact of...

If a firm increases its debt to a very high level, then the positive impact of debt in aligning the interests of management with those of stockholders tends to become negative. Explain why this occurs.

Solutions

Expert Solution

If firm will be increasing its debt to a very high level, then the positive impact of debt in alignment of the interest of management with those of shareholders are becoming negative because high amount of debt capital will be having a lot of risk associated with it because that will be having a fixed obligation attached to them and they can even cause the financial distress to the company so that there would be a high amount of debt in the overall company & It will mean that there is a risk existing to the need insolvency of the company in the long run and that will be leading to non alignment of interest of management with the shareholders as management are taking more debt in order to raise the profits of the company whereas it can be leading to rusk to the overall existence of the company in the long run and this could be also a risk to the overall solvency of the company in the long run so, the positive impact of debt alignment of the interest of the management with shareholders will be becoming negative due to a risk of insolvency.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

If a firm increases its debt to a very high level, then the positive impact of...

As a firm takes on more debt, its probability of bankruptcy_______. (Increases or Decreases) Other factors...

As a firm takes on more debt, its probability of bankruptcy_______. (Increases or Decreases) Other factors held constant, a firm whose earnings are relatively volatile faces a________(Greater or Lower) chance of bankruptcy. Therefore, when other factors are held constant, a firm whose earnings are relatively volatile should use_______(Less or More) debt than a more stable firm. When bankruptcy costs become more important, they __________(Increase or Reduce) the tax benefits of debt. Green Goose Automation Company currently has no debt in...

If a firm increases the amount of debt that it has this could lead to an...

If a firm increases the amount of debt that it has this could lead to an increase in ______. financial risk the cost of equity both the cost of equity and the financial risk none of the above

If a firm increases its financial risk by selling a large bond issue that increases its...

If a firm increases its financial risk by selling a large bond issue that increases its financial leverage explain this assumption?

1) BigDebt firm and SmallDebt firm are identical except for their level of debt and the...

1) BigDebt firm and SmallDebt firm are identical except for their level of debt and the interest rates they pay on debt-BigDebt has more debt and pays a higher interest on that debt. Based on the data given below, what is the difference between two firms' ROEs? Applicable to Both Firms Assets = $400 EBIT = $100 Tax Rate = 35% Firm BigDebt’s Data Debt Ratio = 45% Interest Rate = 12.5% Firm SmallDebt’s Data Debt Ratio = 25% Interest...

Suppose the firm moves from a high-wage to a low-wage country but its level of output...

Suppose the firm moves from a high-wage to a low-wage country but its level of output remains constant at 200 units per day. How will its total employment change?

What is social Darwinism and was its impact positive or negative?

What type of investment normally has a very positive balance of payment impact on the host...

What type of investment normally has a very positive balance of payment impact on the host country? What type of economic orientation or view that perceives FDI to be exploitive in the host country? What phenomenon occurs when there is a disequilibrium in the forex markets and traders can take advantage of it potentially make large profits?

A high and rising level of long-term debt relative to short-term debt might signify that:

A high and rising level of long-term debt relative to short-term debt might signify that: (a) inflation expectations are worsening; (b) monetary policy is too tight; (c) borrowers have confidence in the outlook for inflation and real economic growth; (d) major debt restructuring is imminent.

41. A high and rising level of long-term debt relative to short-term debt might signify that:...

41. A high and rising level of long-term debt relative to short-term debt might signify that: (a) inflation expectations are worsening; (b) monetary policy is too tight; (c) borrowers have confidence in the outlook for inflation and real economic growth; (d) major debt restructuring is imminent. 42. Normally, falling tax rates and rising government spending can be expected to: (a) dampen investment spending; (b) cause long-term interest rates to fall; (c) win legislative approval from the Federal Reserve; (d) create...

Subjects