Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 17, Problem 20PS
Summary Introduction
To determine: The impact on other variables.
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Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity?
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Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?
Suppose interest rates in the economy increase. How would such a change affect the costs of both debt and common equity based on the CAPM?
Chapter 17 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - Prob. 3PSCh. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - Prob. 8PSCh. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Prob. 10PSCh. 17 - Prob. 11PS
Ch. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - Prob. 14PSCh. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 16PSCh. 17 - Prob. 17PSCh. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - Prob. 20PSCh. 17 - Prob. 21PSCh. 17 - Prob. 22PSCh. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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- 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.arrow_forwardCould you use formulas in order to get those answers, like the images I have attached to this follow-up questions?arrow_forward1. (Without loss of generality assume that the expected/maximal exposures mentioned here correspond to a single time point in future, T.) Bank A uses for economic capital (EC) a measure equal to: 1.4 * EPE. Bank B, instead, uses the weighted average: 70% * EPE + 30% * ME. How small (or, indeed, how big?) does the ME (maximal exposure) need to be, relative to the EPE, for Bank A to end up putting aside (for this specific EC aspect) more EC than Bank B?arrow_forward
- If the times interest earned ratio: Multiple Choice Increases, then risk increases. Increases, then risk decreases. Is greater than 1.5, the company is in default. Is less than 1.5, the company is carrying too little debt. Is greater than 3.0, the company is likely carrying too much debt.arrow_forwardManipulating CAPM Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively. b. Find the risk-free rate for a firm with a required return of 14.363% and a beta of 1.07 when the market return is 14%. C. Find the market return for an asset with a required return of 9.045% and a beta of 1.57 when the risk-free rate is 3%. d. Find the beta for an asset with a required return of 10.255% when the risk-free rate and market return are 6% and 9.7%, respectively. a. The required return for an asset with a beta of 1.63 when the risk-free rate and market return are 5% and 13%, respectively, is %. (Round to two decimal places.)arrow_forwardAnswer the following a) When will the different DCF methods use the same discount rate? b) The cost of debt (ka) will change as the capital structure of a firm changes. Why or why not? c) Why does the cost of equity (k.) increase as the amount of debt in the capital structure of a firm increases? Why? d) Freebie Inc.'s common stock has a beta of 1.3. If the risk-free rate is 4.5% and the expected return on the market is 12%, what is its cost of equity capital? e) Why do branded food companies command the highest EBIT multiple (about 8) and transportation companies the lowest (about 3)? f) Should a firm use its cost of capital as a hurdle/discount rate to value all internal divisions? Why or why not? g) An option can have more than one source of value. Consider a mining company. The company can mine for ores today or wait another year (or more) to mine. What real options can you identify here? h) Do you consider dividend payments by the firm in calculating cash flows? Why or why not? i)…arrow_forward
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