ncreases Its use of operating leverage, then you shou expect the firm's: equity beta to increase. ) debt beta to exceed its equity beta. beta of debt to exceed 1.0. asset beta to exceed its equity beta. beta to remain constant as the increased operating leverage will offset the increased financial leverage

ncreases Its use of operating leverage, then you shou expect the firm's: equity beta to increase. ) debt beta to exceed its equity beta. beta of debt to exceed 1.0. asset beta to exceed its equity beta. beta to remain constant as the increased operating leverage will offset the increased financial leverage

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 2QE

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Similar questions

MM Proposition II states that: I) the expected return on equity is positively related to leverage; II) the required return on equity is a linear function of the firm's debt to equity ratio; III) the risk to equity increases with leverage Multiple Choice: A) I, II, and III B) I only C) II only D) III only
This question is related to Chapter 18 of Berk & Demarzo "Capital Budgeting and Valuation with Leverage". How do the calculations of the firm value using the APV method differ between the following assumptions? The growth rate of the EBIT and the debt-equity ratio will be constant The growth rate of the EBIT and the interest coverage ratio will be constant. The firm selects the optimal interest coverage ratio and maintains this ratio constant forever (corporate taxes are the only imperfection) Are the values that result different or equal?
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
Which of the following statements are CORRECT? Check all that apply: The aftertax cost of debt decreases when the market price of a bond increases. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. Cost of capital is also known as the minimum expected or required return an investment must offer to be attractive.
All else held constant, which one of these is most apt to increase the WACC of a leveraged firm? Select one: a. A decrease in the tax rate b. An increase in the risk free rate when the equity beta is > 1 c. A decrease in the dividend growth rate d. An increase in the weight of debt e. A decrease in a firm’s equity beta
Select all that are true with respect to discount rates: Group of answer choices The cost of equity rises as you add leverage to the capital structure because the risk to equity rises as you add leverage. In a CAPM world, the Beta of equity rises as you add leverage to the capital structure. The appropriate discount rate for a project should reflect the systematic risk of the expected cash flows of that project. If the firm has positive debt, then the cost of debt is less than the WACC and the WACC is less than the cost of equity. The appropriate discount rate for a project that has the same risk as the overall firm is the firm’s WACC. The appropriate discount rate for a project that has the same risk as the firm’s equity is the firm’s cost of equity.
If a firm cannot invest retained earnings to earn a rate of returngreater than or equal to the required rate of return on retained earnings, it should return those funds to its stockholders. The cost of equity using the CAPM approach The current risk-free rate of return (rRFrRF) is 4.67% while the market risk premium is 5.75%. The Burris Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Burris’s cost of equity is . The cost of equity using the bond yield plus risk premium approach The Taylor Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Taylor’s bonds yield 11.52%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Taylor’s cost of internal equity is: 18.84% 15.07% 14.32% 18.08% The…
Match the following A premium over and above the risk-free rate. ✓ The computed cost of capital determined by multiplying the cost of each item in the optimal capital structure by its weighted representation in the overall capital structure and summing the results A measure of the amount of debt used in the capital structure of the firm Superior growth of a firm may achieve during its early years, before leveling off to a more normal growth ✓ The earnings available to common stockholders divided by the number of common stock shares outstanding ✓ A line or equation that depicts the risk-related return of a security based on risk-free rate plus a market premium related to the beta coefficient of the security A measure of the spread or dispersion of a series of numbers around the expected value A model for determining the value of a share of stock by taking the present value of an expected stream of future dividends. A. Supernormal Growth B. Market Risk Premium C. Financial Leverage D.…
WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT? A. IF A FIRM'S EXPECTED BASIC EARNING POWER (BEP) IS CONSTANT FOR ALL ITS ASSETS AND EXCEES INTEREST RATE ON ITS DEBT, THEN ADDING ASSETS FINANCING THEM WITH DEBT WILL RAISE THE FIRM'S EXPECTED RATE OF RETURN ON COMMON EQUITY (ROE)? B. THE HIGHER ITS TAX RATE, THE LOWER A FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. C. THE HIGHER THE INTEREST RATE ON ITS DEBT, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. D. THE HIGHER ITS DEBT RATIO, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. E. STATEMENT A IS FALSE, BUT B, C AND D ARE ALL TRUE.
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.
According to Modigliani & Miller M Proposition II (MM Il), as a firm's debt-equity ratio decreases, what happens to the required rate of return on equity? Briefly explain including the key aspect of MM II.
A firm using a Leveraged vs a Conservative Capital Structure would have the following characteristics: 1. More flexible to changes in the economy II. Less flexible to changes in the economy I. More Debt vs Equity IV. Past their break even points at higher levels of production, higher Earnings Per Share (EPS) OA. A. I* & II OB. B. II & II Oc.C. II & IV OD. D. II, III & IV