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Multiple choice- Debt financing, Stock repurchases

The main advantage of debt financing for a firm is:

I) no SEC registration is required for bond issue

II) interest expense of a firm is a tax deductible expense

III) unlevered firms have higher value than levered firms

1. I only
2. II only
3. III only
4. I and III only
5. I and II only

Which of the following statements is most correct?

1. In general, stock repurchases are taxed the same way as dividends.
2. One nice feature of dividend reinvestment plans is that they enable investors to reduce the taxes paid on their dividends.
3. On average, companies send a negative signal to the marketplace when they announce an increase in their dividend.
4. If a company is interested in issuing new equity capital, a new stock dividend reinvestment plan probably makes more sense than an open market dividend reinvestment plan.
5. Statements b and d are correct.

Solution Preview

1) The main advantage of debt financing for a firm is:
I) no SEC registration is required for bond issue
II) interest expense of a firm is a tax deductible expense
III) unlevered firms have higher value than levered firms
1. I only
2. II only
3. III only
4. I and III only
5. I and II only

Answer: 2. II only
SEC registration is required for bond issue
Levered firms have higher value than unlevered firm as debt provides tax shield.

2) Which of the following statements is most correct?
1. In general, stock repurchases are taxed the same way as dividends.
2. One ...

Solution Summary

Answers to 2 multiple choice questions on Debt financing and Stock repurchases

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