Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134202648
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 14.4, Problem 1CC
If a change in leverage raises a firm's earnings per share, should this cause its share price to rise in a perfect market?
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According to Modigliani and Miller, what happens to the cost of equity when the firm increases its leverage? What happens to the firm's WACC?
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Does decreasing net margin percentages and slightly increasing financial leverage have an effect on Return on Equity (ROE)?. If Yes, What should a company do to solve such problem.
Chapter 14 Solutions
Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 14.1 - How does the risk and cost of capital of levered...Ch. 14.2 - Why are investors indifferent to the firms capital...Ch. 14.2 - What is a market value balance sheet?Ch. 14.2 - In a perfect capital market, how will a firms...Ch. 14.3 - How do we compute the weighted average cost of...Ch. 14.3 - With perfect capital markets, as a firm increases...Ch. 14.4 - If a change in leverage raises a firm's earnings...Ch. 14.4 - True or False: When a firm issues equity, it...Ch. 14.5 - Consider the questions facing Dan Harris, CFO of...Ch. 14.5 - Prob. 2CC
Ch. 14 - Consider a project with free cash flows in one...Ch. 14 - You are an entrepreneur starting a biotechnology...Ch. 14 - Acort Industries owns assets that will have an 80%...Ch. 14 - Wolfrum Technology (WT) has no debt. Its assets...Ch. 14 - Suppose there are no taxes. Firm ABC has no debt,...Ch. 14 - Suppose Alpha Industries and Omega Technology have...Ch. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Zetatron is an all-equity firm with 100 million...Ch. 14 - Explain what is wrong with the following argument:...Ch. 14 - Consider the entrepreneur described in Section...Ch. 14 - Hardmon Enterprises is currently an all-equity...Ch. 14 - Suppose Visa Inc. (V) has no debt and an equity...Ch. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Hartford Mining has 50 million shares that are...Ch. 14 - Mercer Corp. has 10 million shares outstanding and...Ch. 14 - In mid-2015 Qualcomm Inc. had 11 billion in debt,...Ch. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Yerba Industries is an all-equity firm whose stock...Ch. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24P
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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
- What make ROE(return on equity) of a company decrease further into negatives even though their financial leverage starts to rises? If a company multiplier for financial leverage starts to rise, what does it implies? Why?arrow_forwardExplain the Modigliani-Miller Payout Policy Irrelevance Proposition. What are the implications of Lintner’s model for firms’ dividend payout behaviour?arrow_forwardWhat are the conditions for stock market efficiency? Is it possible that market for individual stocks could be highly efficient but market for whole companies could be less efficient? Explainarrow_forward
- Discuss how market characteristics can influence the profit rate of a perfectly competitive market firm in the short term and long term.arrow_forwardWhich of the following is likely to increase a firm’s cost of capital? The consideration of a below-average risk project Increasing the proportion of equity in the firm Increasing the proportion of debt in the firm Expectation of lower inflation in the futurearrow_forwardWhen the share price series breaks through the moving average line from below, what would a technical analyst probably suggest?arrow_forward
- Which of the following is not a determinant of investment? a) The efficiency of capital equipment b) The level of consumer demand c) Interest rates d) The willingness of investors to buy new share issuesarrow_forwardWhich of the following statements is INCORRECT? Cutting the firm's dividend to increase investment will raise the share price if, and only if, the new investments have a positive net present value (NPV). If the firm retains more earnings, it will have less to payout to shareholders. A firm will increase its share price by reducing the total payout to shareholders. A firm can increase its growth rate by increasing its retention ratio.arrow_forwardWhich of the following formulas is INCORRECT? g = retention rate × return on new investment. When return on equity is equal to the cost of equity, shareholders will prefer the firms' management to increase the payout ratio. When return on new investment is more than the cost of equity, the share price is expected to increase. g = (1 – payout rate) x return on new investment.arrow_forward
- Reverse engineering share prices is an exercise in deductive reasoning. If we assume market price reflects share value, then through reverse engineering we can infer what the market assumes about a. the expected rate of return on equity capital, holding expected profitability and long-run growth constant. b. the expected profitability, holding the expected rate of return on equity capital and long-run growth constant. c. the expected long-run growth, holding the expected rate of return on equity capital and expected profitability constant.arrow_forwardWhich 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 smaller AFN will be if other things held constant.arrow_forwardIf a firm takes steps that increase its expected future ROE, does this necessarily meanthat the stock price will also increase? Explain.arrow_forward
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