A. When retained earnings are exhausted, the MCC breaks upward. What happens if the firm continues to raise capital after that? Does the MCC remain flat or move further upward? In either case, why? B. Which is incorrect in regard to a firm?s cost of capital? i. It is the risk adjusted discount rate that is appropriate for all projects under consideration by the firm. ii. It is the average rate for using the firms funds. iii. It is the opportunity cost of using the firms funds. iv. It is the minimum rate of return a project must generate to warrant consideration by management.

A. When retained earnings are exhausted, the MCC breaks upward. What happens if the firm continues to raise capital after that? Does the MCC remain flat or move further upward? In either case, why? B. Which is incorrect in regard to a firm?s cost of capital? i. It is the risk adjusted discount rate that is appropriate for all projects under consideration by the firm. ii. It is the average rate for using the firms funds. iii. It is the opportunity cost of using the firms funds. iv. It is the minimum rate of return a project must generate to warrant consideration by management.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

If the firms earns rate of return on its investments equal to the required rate of return it is called O a. Normal firm O b. Growth firm O c. Decline firm Od. Slow firm
When the cost of capital increases, value of the firm Select one: a. No Change b. Increases c. Decreases d. Constant
If the firms earns a higher rate of return on its investments than the required rate of return then it is called a_____ a. Normal firm b. Growth firm c. Decline firm d. Regular firm
Firms will take investments only when expected risks are remunerated by expected profit. * a. Incremental cash flows b. Efficient capital markets c. Risk-return trade-off d. All risks are not equal
a. What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? b. Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. c. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?
Suppose a firm makes the following policy changes. If the change means that external nonspontaneousfinancial requirements (AFN) will increase, indicate this with a (+); indicate adecrease with a (-); and indicate an indeterminate or negligible effect with a (0). Think interms of the immediate short-run effect on funds requirements.a. The dividend payout ratio is increased. _____________b. Rather than produce computers in advance, a computer companydecides to produce them only after an order has been received. _____________c. The firm decides to pay all suppliers on delivery, rather than aftera 30-day delay, to take advantage of discounts for rapid payment. _____________d. The firm begins to sell on credit. (Previously, all sales had been on acash basis.) _____________e. The firm’s profit margin is eroded by increased competition; sales aresteady. _____________f. Advertising expenditures are stepped up. _____________g. A decision is made to substitute long-term mortgage bonds for…
If the debt component in the capital structure is predominant – a. Earnings per share (EPS) will be very low. b. Dividend expectations of equity shareholders are also and P/E Ratio may decrease. c. The fixed interest cost of the firm will be minimum thereby decreasing its risk. d. The fixed interest cost of the firm increases thereby increasing its risk.
Under normal circumstances, the weighted average cost of capital is used as the firm's required rate of return because a. as long as the firm's investments earn returns greater than the cost of capital, the value of the firm will increase b. it is comparable to the average of all the interest rates on debt that currently prevail in the financial markets c. returns below the cost of capital will cover all the fixed costs associated with capital and provide excess returns to the firm's stockholders
Which of the following results from the early repayment of debenture capital by a firm a. The DOL increases b. The DOL decreases c. The DFL increases d. The DFL decreases
Is the debt level that maximizes a firm's expected EPS the same as the one that maximizes its stock price? Explain. Explain how a firm might shift its capital structure so as to change its weighted average cost of capital (WACC). What would be the impact on the value of the firm?
Which of the below statements does the MM Proposition I predict? A. In a perfect market, the value of a firm is independent of its capital structure B.In a perfect market, the discount rate depends on the capital structure C.In a perfect market, the value of a firm decreases in leverage D.In a perfect market, the NPY of investments depends on the existing debt/equity mix
Suppose a firm invest in proects that are much riskier than its average investments. Do you think the firm's weighted average cost of capital will be affected? Explain.

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