Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 12.4, Problem 2CC
Summary Introduction
To discuss: The two methods for estimating a firm’s debt cost of capital.
Introduction:
Cost of capital refers to the return that the investors expect on a particular investment. In other words, it refers to the compensation demanded by the investors for using their capital.
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Chapter 12 Solutions
Corporate Finance
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - Prob. 1CC
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...Ch. 12 - Prob. 22P
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- The cost of equity is _______. A. the interest associated with debt B. the rate of return required by investors to incentivize them to invest in a company C. the weighted average cost of capital D. equal to the amount of asset turnoverarrow_forwardShould short-term debt be considered in calculating cost of capital?arrow_forwardExplains the effect of debt on profit margin and return on assets (ROA).arrow_forward
- What is one classification scheme that firms often use to obtain risk-adjusted costsof capital?arrow_forwardIn computing the cost of capital, do we use the historical costs of existing debt and equity or the current costs as determined in the market? Why?arrow_forwardCapital Structure: Describes the percentage breakdown of a firms’ assets vs. their debt (financing activities). T/Farrow_forward
- Indicate whether the following statement is true or false. Provide the relevant explanations. The higher the proportion of equity in a company’s overall capital structure, the higher return required by its debtholders. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)arrow_forwardHow does the cost of equity based on internal funds differ from the cost of equity based on external funds? Explain. What are the methods involved in dealing with the calculation cost of debt?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_forward
- Which of the following are acceptable criteria for determining the weights in the weighted average cost of capital? A. Market value of the capital structure and historical costs of financing. B. Using book values of the capital structure and the prior level of debt and equity. C. Market value of the capital structure and historical costs of financing. D. Using the after-tax cost of debt and the market value of the capital structure.arrow_forwardDo we utilize the historical costs of existing debt and equity to compute the cost of capital, or do we use the current costs as decided by the market to compute the cost of capital? Why?arrow_forwardDefine the terms “book-value capital structure,” “market-value capital structure,” and“target capital structure,” and explain why they differ from one another.arrow_forward
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