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Questions and Answers
What is the relationship between the cost of debt and the cost of equity according to the traditional approach?
What is the relationship between the cost of debt and the cost of equity according to the traditional approach?
- The cost of debt and cost of equity are inversely related
- The cost of debt and cost of equity are independent of each other
- The cost of debt is always lower than the cost of equity (correct)
- The cost of debt is always higher than the cost of equity
What is the primary goal of a firm's capital structure according to the traditional approach?
What is the primary goal of a firm's capital structure according to the traditional approach?
- To maximize the market value of the firm
- To minimize the cost of equity
- To achieve an optimal balance between debt and equity (correct)
- To increase the cost of debt
What is the effect of financial leverage on a firm's weighted average cost of capital according to the traditional approach?
What is the effect of financial leverage on a firm's weighted average cost of capital according to the traditional approach?
- It has no effect on the weighted average cost of capital
- It decreases the weighted average cost of capital (correct)
- It depends on the firm's total value
- It increases the weighted average cost of capital
What is the shape of the curve of the average cost of capital in Figure 18-1?
What is the shape of the curve of the average cost of capital in Figure 18-1?
What is the relationship between a firm's capital structure and its market value according to the traditional approach?
What is the relationship between a firm's capital structure and its market value according to the traditional approach?
What is a major determinant of capital structure decisions if equity shareholders want to maintain control?
What is a major determinant of capital structure decisions if equity shareholders want to maintain control?
What is the risk referred to when debt is used in capital structure decisions?
What is the risk referred to when debt is used in capital structure decisions?
When is debt financing preferable to equity financing from an EPS point of view?
When is debt financing preferable to equity financing from an EPS point of view?
What happens to ROE when the ROA is less than the cost of debt?
What happens to ROE when the ROA is less than the cost of debt?
Why do cost of different components of capital influence capital structure decisions?
Why do cost of different components of capital influence capital structure decisions?
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