Compare the following two companies.California Corp• Net income margin = 10%• Asset turnover = 3.00• Financial leverage = 2.00Indiana Corp• Net income margin = 40%• Asset turnover = 1.00!3!• Financial leverage = 0.50Which of the following statements are true?California Corp has relied on equitý to finance its assets more than Indiana Corp hasCalifornia Corp has a lower return on equity than Indiana CorpOCalifornia Corp has a higher return on equity than Indiana CorpCalifornia Corp generates more sales for every dollar of assets than does Indiana Corp

Ratio analysis shows the company's liquidity, efficiency and profitability of the company,

Answered: Which of the following statements are…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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which one is correct please confirm? QUESTION 37 Which of the following statements is true concerning companies that do not pay dividends? a. The cost of equity capital can be estimated using the Capital Asset Pricing Model. b. The cost of equity capital is equal to the growth short-term rate of earnings per share. c. The dividend capitalization model can be used to determine an accurate cost of equity capital. d. None of these are correct
Assume that a firm has a cost of debt capital of 0.06, a company tax rate of 0.2, a market value of debt of $10 million, a cost of equity capital of 0.14, and a market value of equity of $10 million. Also assume that the proportion of company taxes claimed by shareholders is 0.5. Which of the following values is the closest to this firm's weighted average cost of capital?
Give typing answer with explanation and conclusion Suppose Abraxas Corp. has an equity cost of capital of 8.2%, market capitalization of $11.37 billion, and an enterprise value of $17.12 billion. Suppose Abraxas's debt cost of capital is 5.6% and its marginal tax rate is 21%. What is Abraxas's WACC?
Corporate Finance Company A and Company B’s revenues and variable expenses (e.g. COGS) are identical, butA’s fixed expenses (e.g. SG&A) are smaller than B’s (see table below). Assuming the size of theirrevenues are 100% correlated with the strength of the economy, would A’s equity Beta be smaller,the same, or larger than B’s equity beta? Explain why. Strength of economy: Weak Economy Strong EconomyCompany A B A BRevenues 150 150 180 180Variable Expenses 20 20 30 30Fixed Expenses 20 100 20 100EBT 110 30 130 50
M9
Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 7.9%, a debt cost of capital of 6.4%, a marginal corporate tax rate of 21%, and a debt-equity ratio of 2.7. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. a. What is Goodyear's WACC? The WACC is %. (Round to two decimal places.)
Generally speaking, the cost of debt is cheaper than the cost of equity. Does it imply that a firm should increase its debt-to-equity ratio to as high as possible such that its corporate cost of capital can be minimized?
1. Assume that capital markets are perfect: there are no transactions costs or taxes, no bankruptcy costs, individuals can borrow and lend at the same rate as corporations can, and all agents in the economy have the same information. Let us compare two corporations that are identical except that one is all equity financed and the other is part equity and part debt financed. Denote the value of the unlevered (all equity) firm by VU and the value of the levered firm by VL. Assume that • Vu = $20,000 • Interest rate on the firm's debt is .10 • The firms generate identical net revenues of $2000 in good times $500 in bad times • Levered firm has $5,000 of debt A. Compute the cash flows accruing to an investor who borrows on her personal account an amount equal to one percent of the debt of the levered firm and purchases one percent of the unlevered firm. B. Next compute the cash flows of an investor who purchases one percent of the equity of the levered firm. C. Using your results in parts…
When a profitable business has no mandated loan capital but there are non-mandated liabilities a. the return on equity always exceeds the return on total capitalb. the return on equity always equals the return on total capitalc. the return on equity may be equal to the return on total capitald. the return on equity always lags behind the return on total capital choose one
Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.1%, a debt cost of capital of 6.6%, a marginal corporate tax rate of 22%, and a debt-equity ratio of 2.5. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. Question content area bottom a. What is Goodyear's WACC? The WACC is enter your response here%. (Round to two decimal places.)
All computations must be done and shown in detail. In each of the theories of capital structure the cost of equity rises as the amount of debt increases. So why don’t financial managers use as little debt as possible to keep the cost of equity down? After all, isn’t the goal of the firm to maximize share value and minimize shareholder costs? b) Country Markets has an unlevered cost of capital of 12 percent, a tax rate of 38 percent, and expected earnings before interest and taxes of $15,700. The company has $12,000 in bonds outstanding that have a 6 percent coupon and pay interest annually. The bonds are selling at par value. What is the cost of equity?
Which statement is correct?a. The cost of debt is determined by taking the present value of the interest payments and principal times one minus the tax rate.b. The difference in computing the cost of capital between using the accumulated profits and issuance of new ordinary shares is the growth rate.c. Increase in flotation costs, increase in the company’s beta and increase in the expected inflation will all lead to d. increase the company’s weighted average cost of capital.e. Increasing the company’s dividend payout would mitigate the company’s need to raise new ordinary shares.f. none of the above

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