Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 11, Problem 12DQ
What effect would inflation have on a company’s cost of capital? (Hint: Think about how inflation influences interest rates, stock prices, corporate profits, and growth.) (LO11-3)
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P10.4
Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show
the information for two potential comparable companies. Calculate the unlevered cost of capital based on the
following assumptions. Neither company expects its free cash flows to grow.
Income tax rate for interest (TINT).
Value of debt
Value of preferred stock.
Value of equity
Maturity of debt (years)
Debt cost of capital.
Preferred stock cost of capital.
Equity cost of capital.
Low Leverage
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High Leverage
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35.0%
$ 4,000
$ 1,000
$15,000
45.0%
$45,000
$
0
Perpetual
$ 5,000
Perpetual
5.0%
8.0%
6.0%
11.8%
28.0%
a.
b.
C.
Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered
cost of capital.
Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt.
Assume that interest is tax deductible but that the company refinances its debt at the end of each year
(annual…
FE1
Show your work for problem solving questions. If you use one or more sources of information in preparing any answer, provide an APA-style reference, identify any quoted information, and cite a reference wherever it is used.
How would each of the following events change the equilibrium financial market value of a company? (a)an increase in its cost of production; (b) an increase in its cost of financing; (c) an increase in the market’s discount rate; (d) an increase in its sales revenue; and (e) an increase in its projected future profits.
A6)
Finance
1. What of the following statements is not correct? _____
the higher the sales growth rate g is, the larger AFN will be—other things held constant.
The higher the capital intensity ratio, the larger AFN will be—other things held constant.
The higher the firm’s spontaneous liabilities, the smaller AFN will be—other things held constant.
The higher the payout ratio, the larger AFN will be if other things held constant.
Chapter 11 Solutions
Foundations of Financial Management
Ch. 11 - Why do we use the overall cost of capital for...Ch. 11 - How does the cost of a source of capital relate to...Ch. 11 - Prob. 3DQCh. 11 - Why is the cost of debt less than the cost of...Ch. 11 - What are the two sources of equity (ownership)...Ch. 11 - Explain why retained earnings have an associated...Ch. 11 - Why is the cost of retained earnings the...Ch. 11 - Why is the cost of issuing new common stock Kn...Ch. 11 - How are the weights determined to arrive at the...Ch. 11 - Explain the traditional, U-shaped approach to the...
Ch. 11 - Prob. 11DQCh. 11 - What effect would inflation have on a company’s...Ch. 11 - What is the concept of marginal cost of capital?...Ch. 11 - In March 2010, Hertz Pain Relievers bought a...Ch. 11 - Speedy Delivery Systems can buy a piece of...Ch. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Calculate the aftertax cost of debt under each of...Ch. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Airborne Airlines Inc. has a $1,000 par value bond...Ch. 11 - Russell Container Corporation has a $1,000 par...Ch. 11 - Prob. 11PCh. 11 - KeySpan Corp. is planning to issue debt that will...Ch. 11 - Medco Corporation can sell preferred stock for $90...Ch. 11 - Wallace Container Company issued $100 par value...Ch. 11 - Prob. 15PCh. 11 - Murray Motor Company wants you to calculate its...Ch. 11 - Compute KeandKn under the following...Ch. 11 - Business has been good for Keystone Control...Ch. 11 - Prob. 19PCh. 11 - Evans Technology has the following capital...Ch. 11 - Sauer Milk Inc. wants to determine the minimum...Ch. 11 - Given the following information, calculate the...Ch. 11 - Prob. 23PCh. 11 - Prob. 24PCh. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - Delta Corporation has the following capital...Ch. 11 - The Nolan Corporation finds it is necessary to...Ch. 11 - The McGee Corporation finds it is necessary to...Ch. 11 - Eaton Electronic Company’s treasurer uses both...Ch. 11 - Compute the $ change in “Total Assets� over...Ch. 11 - Do the same computation for “Stockholders’...Ch. 11 - Do the same computation for “Long-Term Debt.�Ch. 11 - Prob. 5WE
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- D3) Finance Please explain negative growth equity markets and share valuation.arrow_forwardDefine the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant? Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate, the amount of accounts payable, the profit margin, and the payout ratio.arrow_forwardM6arrow_forward
- B3 ) Do you think that these techniques(Payback period traditional, Discount payback period modern ,net present value and profitability index ) are really helpful to financial managers?arrow_forwardWhat is WACC? Why do firms compute it? What happens to WACC when the debt level of a firm changes?arrow_forward11.Explain why a firm needs to understand their allocation of debtfinancing to equity (the amount the owner used to fund thebusiness). Discuss how this allocation can impact their Total DebtRatio. Can having too much debt bring down profit margins? Why orWhy Not?arrow_forward
- Ay 2.arrow_forwardWhich is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity?arrow_forwardHow would rising interest rates, that increase the weighted average cost of capital (WACC) impact business valuations? Would this change if the company being valued was going to receive revenue from the government spending?arrow_forward
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