How would each of the following scenarios affect a firm's cost of debt, ra(1-T); its cost of equity, s; and its WACC? Indicate with a plus (+), a minus (-), or a zero (0) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion. Probable Effect on ra(1-T) WACC rs a. The corporate tax rate is lowered. b. The Federal Reserve tightens credit. c. The firm uses me debt; that is, it increases its debt ratio. The dividend payout ratio is increased The firm doubles the amount of capital it raises during the year. е. The firm expands into a risky new area. f. The firm merges with another firm whose earnings g. are countercyclical both to those of the first firm and to the stock market. h. The stock market falls drastically, and the firm's stock price falls along with the rest. i. Investors become me risk-averse. j. The firm is an electric utility with a large investment in nuclear plants. Several states are considering a ban on nuclear power generation
How would each of the following scenarios affect a firm's cost of debt, ra(1-T); its cost of equity, s; and its WACC? Indicate with a plus (+), a minus (-), or a zero (0) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion. Probable Effect on ra(1-T) WACC rs a. The corporate tax rate is lowered. b. The Federal Reserve tightens credit. c. The firm uses me debt; that is, it increases its debt ratio. The dividend payout ratio is increased The firm doubles the amount of capital it raises during the year. е. The firm expands into a risky new area. f. The firm merges with another firm whose earnings g. are countercyclical both to those of the first firm and to the stock market. h. The stock market falls drastically, and the firm's stock price falls along with the rest. i. Investors become me risk-averse. j. The firm is an electric utility with a large investment in nuclear plants. Several states are considering a ban on nuclear power generation
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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Transcribed Image Text:How would each of the following scenarios affect a firm's cost of debt, ra(1-T); its cost of equity, s; and its
WACC? Indicate with a plus (+), a minus (-), or a zero (0) whether the factor would raise, lower, or have an
indeterminate effect on the item in question. Assume for each answer that other things are held constant, even
though in some instances this would probably not be true. Be prepared to justify your answer but recognize that
several of the parts have no single correct answer. These questions are designed to stimulate thought and
discussion.
Probable Effect on
ra(1-T)
WACC
rs
a. The corporate tax rate is lowered.
b. The Federal Reserve tightens credit.
c. The firm uses me debt; that is, it increases
its debt ratio.
The dividend payout ratio is increased
The firm doubles the amount of capital it raises
during the year.
е.
The firm expands into a risky new area.
f.
The firm merges with another firm whose earnings
g.
are countercyclical both to those of the first firm and
to the stock market.
h.
The stock market falls drastically, and the firm's stock
price falls along with the rest.
i.
Investors become me risk-averse.
j.
The firm is an electric utility with a large investment in
nuclear plants. Several states are considering a ban
on nuclear power generation
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