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

Solutions

Expert Solution

both the cost of equity and the financial risk

the financial risk would increase that would lead to a cost in the equity capital

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A firm has debt due next year and the amount is 100. It has cash of...

A firm has debt due next year and the amount is 100. It has cash of 10. It has only 1 project to invest. If the project succeeds, it will generate 1000 cash flow next year and 0, otherwise. Probability of success is 5%. Initial cost of project is 10. If the firm does not invest in the project, it will put 10 cash into risk-free asset. Risk-free return is 2%. Discount rate for the project cash flow is 10%....

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.

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

1.A firm has a significant amount of debt outstanding and its operations hit a rough patch....

1.A firm has a significant amount of debt outstanding and its operations hit a rough patch. If it appears that bankruptcy is imminent, the firm’s management may invest in high-risk projects having a negative NPV because: A.the firm’s equity beta is now negative. B.the firm’s debt beta is now negative. C.corporate income taxes are no longer a concern. D.the firm’s debt holders bear most of the project’s downside risk. 2.Home Builder Supply, a retailer in the home improvement industry, currently...

True/False: In the context of perfect capital markets, suppose a firm increases the proportion of debt...

True/False: In the context of perfect capital markets, suppose a firm increases the proportion of debt in its capital structure, but leaves all other aspects of its business unchanged. Taken together, the Modigliani-Miller Propositions tell us that the firm’s increased reliance on the relatively cheap debt financing is perfectly offset by a rise in the required return paid to shareholders (as well as a potential rise in the required return paid to debt holders), such that the value of the...

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...

The debt-equity ratio determines the amount of _____ risk that is associated with a firm. business...

The debt-equity ratio determines the amount of _____ risk that is associated with a firm. business systematic unsystematic financial

The debt-equity ratio determines the amount of _____ risk that is associated with a firm. business...

The debt-equity ratio determines the amount of _____ risk that is associated with a firm. business systematic unsystematic financial

A firm with no debt financing has a firm value of $50 million. It has a...

A firm with no debt financing has a firm value of $50 million. It has a corporate marginal tax rate of 35 percent. The firm’s investors are estimated to have marginal tax rates of 22 percent on interest income and a weighted average of 17 percent on stock income. The firm is planning to change its capital structure by issuing $10 million in debt, and repurchasing $10 million of common stock. Based on the information above, answer next 2 questions....

A firm that wanted to move to a higher debt ratio could offer to trade new...

A firm that wanted to move to a higher debt ratio could offer to trade new debt for outstanding shares. A firm that wanted to move to a more conservative capital structure could offer to trade new shares for outstanding debt securities. What would be the stock price reaction to moving higher debt ratio by exchanging debt for equity? Explain using trade-off and pecking order theories of capital structure.

Subjects