Business, 27.03.2020 23:56 BluVoid9255

Regarding the trade-off theory, a firm would reach its optimal capital structure if:
a. the tax savings from additional leverage are offset by the increased costs of distress.
b. the present value of the tax shield exceeds the value of the all-equity-financed firm.
c. additional borrowing results in lower financial distress costs.
d. additional borrowing is offset by the interest tax shield.

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Answer from: kitkat033157

The Correct Answer is C.

the trade-off theory posits that a firm would reach it's optimal capital structure if the tax savings from additional borrowing results in lower financial distress costs.

Explanation:

The combination of debt and equity used by a company to finance its operations and growth is referred to as it's capital structure. Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock, or retained earnings.

A company capital structure is affected by cost of capital. The higher the cost of borrowing the less the present value of the firm’s future cash flows, discounted by the Weighted Average Cost of Capital (WACC) and vice versa.

The weighted average cost of capital (WACC) is arrived at by calculating a firm's cost of capital in which each category of capital and proportionately weighing them. Categories of capital include including common stock, preferred stock, bonds, and any other long-term debt, are included in a WACC calculation.

Thus, the primary objective of the office of the finance manager should be to find the optimal capital structure that will result in the lowest WACC and the maximum value of the company (shareholder wealth).

Why?

The optimal capital structure is estimated by calculating the mix of debt and equity that minimizes the weighted average cost of capital (WACC) of a company while maximizing its market value.

Thus when additional borrowing results in lower financial distress costs, the firm achieves the potential to reach it's Optimal Capital Structure.

Cheers!

Answer from: Quest

the investment was $14,174.196

explanation:

a lump sum means that the father of the example made one deposit and leave it be.

we need to know the value of a capital that generated at 4.05% per year during 28 years the sum of $48,613.24

$capital * (1+0.045)^{28} = 48,613.24$

now clearing the formula to solve for capital we got:

$capital = \frac{48,613.24}{(1+0.045)^{28}}$

and we reach the answer investment = $14,174.20

Answer from: Quest

urban company reports the following information regarding its production cost: units produced 37,000 units direct labor $ 30 per unit direct materials $ 35 per unit variable overhead $ 237,000 in total fixed overhead $ 127,000 in total

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Regarding the trade-off theory, a firm would reach its optimal capital structure if:
a. the ta...