What is the optimal capital structure

Assignment Help Accounting Basics

Reference no: EM132759219

Problem 1: According to the static tradeoff theory, what's the optimal capital structure?

A. A firm should borrow up to the point at which the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress.

B. A firm should borrow up to the point at which the tax benefit from an extra dollar is equal to zero.

C. A firm should have equal parts equity and debt.

D. A firm should borrow up to the point at which the interest is equal to the total tax expense.

Problem 2: Which of the following is not a major disadvantage to the SML approach?

A. We rely on the past to predict the future, and economic conditions can change quickly.

B. It requires that we estimate the market risk premium, and if this estimate is poor, the resulting cost of equity will also be poor.

C. It requires that we estimate the beta coefficient of the stock, and if this estimate is poor, the resulting cost of equity will also be poor.

D. It doesn't explicitly adjust for risk

Reference no: EM132759219

Questions Cloud

Which column total is larger : The receipt of 3,000 from a client on account was posted as a 3,000 debit to cash and a 3,000 credit to sales. Which column total is larger

What alphabet weighted average cost of capital : risk-free rate is 1 percent and that the market risk premium is 7 percent. The firm's beta coefficient is 0.97. What Alphabet's weighted average cost of capital

How long after a firm files for bankruptcy protection : How long after a firm files for bankruptcy protection do creditors have to wait before submitting their own reorganization plan to the court?

What discount rate should be assigned to the project : The firm is currently considering a project that has a beta of 1.03 and a project life of six years. What discount rate should be assigned to this project?

What is the optimal capital structure : According to the static tradeoff theory, what's the optimal capital structure? A firm should borrow up to the point at which the tax benefit

What is the concept of using debt to make a return known as : Evaluate new projects by sorting projects into risk classes, and add or subtract adjustment factors from the WACC. This approach is called the

Prepare the Statement of Cash Flows for Cardi Company : Common Stock exchanged for outstanding Long-Term Notes Payable of $150,000. Prepare the Statement of Cash Flows for Cardi Company using the indirect method

Determine what will the value of the firm be : The firm can borrow at 7.4 percent, and the corporate tax rate is 34 percent. What will the value of the firm be if it converts to 50 percent debt?

What is the abbreviation for the overall return : What's the abbreviation for the overall return that a firm must make on its existing assets, used as the required rate of return on any investment

User Account

All Pages