70.2K

Verified Solution

Link Copied!

please answer 3-5

3. Which of the following statements is CORRECT, holding other things constant a. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt. b. An increase in the personal rate in tikely to increase the deberation the common c. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation. d. An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure. e. An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure. 4. Which of the following statements is CORRECT? a. In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs. b. A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal. e There is no reason to think that changes in the personal tax rate would affect firme capital structure clecisions d. If a firm's after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC ly increasing its use of debt. e Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity financing 5. Eccles, Inc., a zero growth firm, has an expected EBIT of $100,000 and a corporate tax rate of 30%. Eccles uses $500,000 of 12.0% debt, and the cost of equity to an unlevered firm in the same risk class is 16.0%. What is the value of the firm according to MM with corporate taxes? (Hint: look at equation 168.)

Answer & Explanation Solved by verified expert

See Answer