Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

A firm's after-tax cost of debt will increase if there is a(n):

increase in the market interest rate

increase in the firm's tax shield

decrease in the firm's marginal tax rate

decrease in the coupon rate on existing debt

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Verified step by step guidance

Understand the concept of after-tax cost of debt: The after-tax cost of debt is the effective cost a firm incurs for its debt after accounting for the tax benefits of interest payments. It is calculated as: \( \text{After-tax cost of debt} = \text{Interest rate} \times (1 - \text{Tax rate}) \).

Analyze the impact of an increase in the market interest rate: If the market interest rate increases, the firm may need to issue new debt at higher interest rates, raising the cost of debt. This directly increases the after-tax cost of debt.

Evaluate the effect of an increase in the firm's tax shield: A tax shield refers to the reduction in taxable income due to deductible expenses like interest payments. An increase in the tax shield does not increase the after-tax cost of debt; instead, it reduces the effective cost of debt.

Consider the impact of a decrease in the firm's marginal tax rate: A lower marginal tax rate reduces the tax benefit of interest payments, leading to a higher after-tax cost of debt. This is because the \( (1 - \text{Tax rate}) \) factor in the formula increases.

Assess the effect of a decrease in the coupon rate on existing debt: A lower coupon rate on existing debt does not increase the after-tax cost of debt. It reduces the interest expense, which lowers the cost of debt overall.