CHAPTER 15 Flashcards
In general, the gain to investors from the tax deductibility of interest payments is
referred to as the interest tax shield.
YES
As Modigliani and Miller made clear in their original work, capital structure
matters in perfect capital markets. Thus, if capital structure does not matter,
then it must stem from a market imperfection.
NO
As Modigliani and Miller made clear in their original work, capital structure does not matter in perfect capital markets. Thus, if capital structure matters, then it must stem from a market imperfection.
YES
Because Corporations pay taxes on their profits after interest payments are
deducted, interest expenses reduce the amount of corporate tax firms must pay.
YES
The interest tax shield is the additional amount that a firm would have paid in
taxes if it did not have leverage.
YES
To compute the increase in the firm’s total value associated with the interest tax
shield, we need to forecast how a firm’s debtand therefore its interest
payments.
YES
Given a forecast of future interest payments, we can determine the interest tax
shield and compute its present value by discounting it at a rate that corresponds
to its risk.
YES
There is an important tax advantage to the use of debt financing.
YES
The total value of the unlevered firm exceeds the value of the firm with leverage
due to the present value of the tax savings from debt.
NO
The total value of the levered firm exceeds the value of the firm without leverage due to the present value of the tax savings from debt.
YES
The WACC represents the cost of capital for the free cash flow generated by the
firm’s assets.
YES
With tax-deductible interest, the effective after-tax borrowing rate is r(τC).
NO
With tax-deductible interest, the effective after-tax borrowing rate is r(1 - τC).
YES
The tax deductibility of interest lowers the effective cost of debt financing for the firm.
YES
When a firm uses debt financing, the cost of the interest it must pay is offset to some extent by the tax savings from the interest tax shield.
YES
