Question

7. If a firm uses no debt, risk of equity is financial risk, not business risk....

7. If a firm uses no debt, risk of equity is financial risk, not business risk.

a. True

b. False

8. A firm seeking financial flexibility may borrow less than the optimal level of debt .

a. True

b. False

9. Business risk refers to the extra risk stockholders bear from the use of debt as compared with the risk they would bear without debt use.

a. True

b. False

Homework Answers

Answer #1

1.The given statement is False

Financial risk refers to a company's ability to manage its debt and financial leverage.Thus If a firm uses no debt, risk of equity is business risk, not a financial risk.

2.The given statement is True.

Financial flexibilty is used to describe a company's ability to react to unexpected expense and investment opportunities.As the level of debt increases,the risk associated with financial hardship grows.Thus a firm seeking financial flexibility may borrow less than the optimal level of debt.

3.The given statement is False.

Financial risk refers to the extra risk stockholders bear from the use of debt as compared with the risk they would bear without debt use..

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Which of the following statements is true about operating leverage of a firm? It is the...
Which of the following statements is true about operating leverage of a firm? It is the portion of stockholders' risk, over and above basic business risk. It refers to the extent to which fixed-income securities (debt and preferred stock) are used in a firm's capital structure. It refers to the presence of fixed operating costs that do not change when the level of sales changes. It is the ability to borrow money at a reasonable cost when good investment opportunities...
5. The amount of debt capital used by a corporation is not related to the availability...
5. The amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock. True False 6. The cost of new common stock is greater than the cost of outstanding common stock. True False 7. In determining the cost of preferred stock, the earnings on outstanding preferred stock may be used as a proxy. True False 8. The out-of-pocket cost of common stock is a good approximation of...
1A. A banker mainly uses financial statement ratio analysis to determine the company’s a. ability to...
1A. A banker mainly uses financial statement ratio analysis to determine the company’s a. ability to generate cash flows to service its debt. b. fair value of assets pledged as collateral c. ability to generate income to pay principal and interest amounts. 1B. Leverage refers to the increase in return on equity that a company can earn (over and above its return on assets) as a result of borrowing money from debt holders. As a company continues to borrow from...
A firm calculates its cost of debt and finds it to be 9.75%. It then calculates...
A firm calculates its cost of debt and finds it to be 9.75%. It then calculates its cost of equity capital and finds it to be 16.25%. The firm’s chairman tells the chief financial officer that the firm should issue debt because it is cheaper than equity. How should the chief financial offi- cer respond to the chairman? (You may assume that the chief financial officer’s job is secure!) The cost of debt is always less than the cost of...
Problem 21-05 Given the following, determine the firm’s optimal capital structure: Debt/Assets After-Tax Cost of Debt...
Problem 21-05 Given the following, determine the firm’s optimal capital structure: Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 6 % 13 % 10 6 13 20 7 13 30 7 13 40 9 14 50 10 15 60 12 16 Round your answers for capital structure to the nearest whole number and for the cost of capital to one decimal place. The optimal capital structure: _______ % debt and ______% equity with a cost of capital of...
T or F Changes in financing terms will influence financial risk but not business risk. a....
T or F Changes in financing terms will influence financial risk but not business risk. a. True b. False
1- Under the theory of Modigliani & Miller without taxes, which of the following statements is...
1- Under the theory of Modigliani & Miller without taxes, which of the following statements is false? a) The capital structure is irrelevant. b) The cost of equity is a linear function of the equity-to-debt ratio. c) The value of the levered company is equal to the value of the unlevered company. d) The cost of equity increases as the debt-to-equity ratio increases. 2 - Which of the following statements is true regarding the pecking order theory? a) The external...
Problem 21-04 The financial manager of a firm determines the following schedules of cost of debt...
Problem 21-04 The financial manager of a firm determines the following schedules of cost of debt and cost of equity for various combinations of debt financing: Debt/Assets After-Tax Cost of Debt Cost of Equity 0 % 4 % 8 % 10 4 8 20 4 8 30 5 9 40 6 10 50 8 12 60 10 14 70 12 16 Find the optimal capital structure (that is, optimal combination of debt and equity financing). Round your answers for the...
#1. A firm should use as much non-financial liability financing as it can if A) a...
#1. A firm should use as much non-financial liability financing as it can if A) a firm should try to limit the amount of non-financial liability financing it uses B) there is an operational linkage involved C) arbitrageurs can easily and quickly undo choices that are suboptimal D)its risk-adjusted cost of capital is below that of other sources of financing #2. A bondʹs promised rate of return will be A) greater than or equal to the firmʹs overall weighted average...
If Inc. were an all-equity firm, it would have a beta of 1.2. The market risk...
If Inc. were an all-equity firm, it would have a beta of 1.2. The market risk premium is 10 percent, and the return on government bond is 2 percent. The company has a debt-equity ratio of 0.65, which, according to the CFO, is optimal. Soroc Inc. is considering a project that requires the initial investment of $28 million. The CFO of the firm has evaluated the project and determined that the project’s free cash flows will be $3.3 million per...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT