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

Solutions

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

Next > < Previous

Related Solutions

a. What are agency costs? Why do these tend to increase in severity, as a company...

a. What are agency costs? Why do these tend to increase in severity, as a company grows larger? b. Think back to the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar restaurant, but your parents paid the bill. Did you order more food (or more expensive food) when your parents paid? Explain how this relates to the agency problem in corporations. c. You are...

according to agency theory, the existence of debt imposes agency costs. Explain why an increase in...

according to agency theory, the existence of debt imposes agency costs. Explain why an increase in debt would increase agency costs?

How can a company increase their click-through rate?

How does hedging increase firm value? From the dicounted casf flow (DCF) method perspective, can you...

How does hedging increase firm value? From the dicounted casf flow (DCF) method perspective, can you explain how hedging usind derivative contracts can increase the value of a firm?

how can one tell if a stock may increase in value in the future or what...

how can one tell if a stock may increase in value in the future or what may one look for? Give four examples stocks that may increase in value in the future.

An investor has two stocks: stock A and stock B. Each stock may increase in value,...

An investor has two stocks: stock A and stock B. Each stock may increase in value, decrease in value, or remain unchanged. Consider the experiment of investing in the two stocks and observing the change (if any) in value. a. Construct a tree diagram for this experiment. b. Use the tree diagram to construct the sample space for this experiment. c. If possible, calculate the probability that at least one of the stocks will increase in value. If not possible,...

An effective strategy for reducing operating costs is ____ A) Seeking risk reduction through international asset...

An effective strategy for reducing operating costs is ____ A) Seeking risk reduction through international asset diversification B) Developing economies of vertical integration C) Accessing new capital markets D) Following the customers

How are agency costs related to dividend policy?

Define forward and futures contracts and explain how they may be used in hedging and speculation....

Define forward and futures contracts and explain how they may be used in hedging and speculation. Explain, using numerical examples, the settlement mechanisms of forward and futures contracts and discuss how these are likely to affect the probability of, and loss from default.

What are agency problems that may exist within a company? How can these issues be mitigated?

Subjects