a) The higher the proportion of equity in a company’s overall capital structure, the higher return required by its debtholders. (Explain your reasoning – provide a numerical example supporting your answer.) b) In the presence of corporate taxes, a company would prefer to raise debt only when the benefits of the tax shield fully offset the cost of debt. (Explain your reasoning – provide a numerical example supporting your answer.) c) In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain your reasoning –, provide a numerical example supporting your answer.)
Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations.
a) The higher the proportion of equity in a company’s overall capital structure, the
higher return required by its debtholders. (Explain your reasoning – provide a numerical example supporting your answer.)
b) In the presence of corporate taxes, a company would prefer to raise debt only
when the benefits of the tax shield fully offset the cost of debt. (Explain your
reasoning – provide a numerical example supporting your
answer.)
c) In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain your
reasoning –, provide a numerical example supporting your
answer.)
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