Answer:
D Maintaining the same level of current assets as Sam'sE Utilizing its total assets more efficiently than Sam's.
Explanation:
In general, the higher the ratio – the more "turns" – the better. But whether a particular ratio is good or bad depends on the industry in which your company operates.
Answer:
C. VL = VU + PV(Tax Shield) - PV(CFD)
Explanation:
The static trade off theory is a theory of capital structure in corporate finance, first proposed by Alan Kraus and Robert H. Litzenberger. The theory emphasizes the trade-offs between the tax benefits of increasing leverage and the cost of bankruptcy associated with higher leverage. The <u>answer is C</u> as we know relative to the unleveraged firm, leverage provides both costs and benefits. The benefits are the tax shields provided by debt.
Answer:
Residual Income = $6,000
Explanation:
Residual income is the excess income of a firm leftover the opportunity cost of capital or over the desired income.
Given,
The minimum rate of return 12%
Average operating assets = $300,000
Net operating income = $42,000
We know,
Residual Income = Net Operating Income - (Average operating assets x the minimum rate of return)
Residual Income = $42,000 - ($300,000 x 12%)
Residual Income = $42,000 - $36,000
Residual Income = $6,000
Answer:
Value of levered firm is $846,506
Explanation:
The value of levered firm will be the sum of value of the future incomes for the shareholder's at the cost of capital of un-levered firm discounted at cost of equity and the tax advantage of debt.
The value of equity = Profit before tax * (1 - Tax) / Cost of capital
The tax advantage = Value of debt * tax rate
Now putting the values in both above equation:
Value of equity = $138,000 (1 - 34%) / 13% = $6,69,706
The tax advantage of Debt = $520,000 * 34% = $176,800
Value of levered firm = $669,706 + $176,800 = $846,506
