5. How may hedging increase value of a company through a. Reducing agency costs b. Reducing...

5. How may hedging increase value of a company through

a. Reducing agency costs

b. Reducing costs of financial distress

c. Tax optimization

Explain

Expert Solution

Answer-

The correct Option is b. Reducing costs of financial distress.

The hedging helps in reducing the effect of volatility and wild swings in the currency exchange rates and will help in reducing the effects of adverse effects on the profitability of the firm.

The hedging helps in losses due to currency volatility which will help in negating the losses incurred due to change in relative prices in currencies or assets which helps in reducing financial distress by stabilizing the cash flow of the company.
The value of the company is increased or enhanced by streamlining the cash flows and reducing the financial distress that may be caused without hedging.

The other options are incorrect.

The hedging has no role to play in reducing agency costs as these are conflicts between agents and principal or managers and shareholders.
The tax optimization cannot be done by hedging as tax optimization can be acheived by changing the capital structure of company ie. by changing the equity and debt proportion in the capital structue of a project or firm.

jeff jeffy answered 1 year ago

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