Q1 Exam Flashcards
1
Q
Why is the value of the project with all equity financing less
than the value with debt financing?
A
Debt tax shields reduce the tax burden
2
Q
Why would the value of the project with $xxxxx of debt higher
than that of the project with a x% debt-to-firm value ratio?
A
The PV of the debt tax shields is smaller with the constant
leverage policy
This is because the debt tax shields are discounted at different rates
The fixed debt policy: discounted at the cost of debt
The constant leverage policy: discounted at the expected
asset return
