Firm becomes more risky and thus should have less debt

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Reference no: EM132046016

1. "Empirical results have indicated that the post-merger firm has less debt capacity than the combined total for the pre-merger firms because after the merger, the firm becomes more risky and thus should have less debt." True or false?

2. "The increase in debt ratio raises the interest rate and interest expenses and possibly incurs higher financial distress as well as agency costs and results in a lower expected net income, and thus a lower expected earnings per share, E(EPS)." True or false?

3. Your Company is considering a new project that will require $990,000 of new equipment at the start of the project. The equipment will have a depreciable life of 9 years and will be depreciated to a book value of $301,500 using straight-line depreciation. The cost of capital is 14%, and the firm's tax rate is 34%. Estimate the present value of the tax benefits from depreciation (closest to).

$76,500

$50,490

$26,010

$128,655

Reference no: EM132046016

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