PRINCIPLES OF CORPORATE FINANCE
13th Edition
ISBN: 9781264052059
Author: BREALEY
Publisher: MCG
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Textbook Question
Chapter 17, Problem 6PS
MM’s propositions What is wrong with the following arguments?
- a. As the firm borrows more and debt becomes risky, both stock- and bondholders demand higher
rates of return . Thus, by reducing the debt ratio, we can reduce both the cost of debt and thecost of equity , making everybody better off. - b. Moderate borrowing doesn’t significantly affect the probability of financial distress or bankruptcy. Consequently, moderate borrowing won’t increase the expected rate of return demanded by stockholders.
- c. A capital investment opportunity offering a 10%
internal rate of return is an attractive project if it can be 100% debt-financed at an 8% interest rate. - d. The more debt the firm issues, the higher the interest rate it must pay. That is one important reason that firms should operate at conservative debt levels.
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Chapter 17 Solutions
PRINCIPLES OF CORPORATE FINANCE
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - Corporate leverage Reliable Gearing currently is...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 7PSCh. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - Prob. 9PSCh. 17 - Prob. 10PS
Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - MM proposition 2. Increasing financial leverage...Ch. 17 - Prob. 13PSCh. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - MM proposition 2 Look back to Problem 17. Suppose...Ch. 17 - Prob. 19PSCh. 17 - After-tax WACC Gaucho Services starts life with...Ch. 17 - After-tax WACC Omega Corporation has 10 million...Ch. 17 - After-tax WACC Gamma Airlines has an asset beta of...Ch. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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