Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 18.4, Problem 2CC
Summary Introduction
To discuss: The statement that the firm retains a constant debt to equity ratio to make simpler flow-to equity computation.
Introduction:
The debt-equity ratio specifies how much debt a company is using to invest in its assets, in relation to the worth of shareholders equity. This ratio is computed by dividing the company’s total liabilities by its shareholder’s equity; which is used to know the company’s financial leverage.
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Chapter 18 Solutions
Corporate Finance
Ch. 18.1 - What are the three methods we can use to include...Ch. 18.1 - Prob. 2CCCh. 18.2 - Prob. 1CCCh. 18.2 - Prob. 2CCCh. 18.3 - Prob. 1CCCh. 18.3 - Prob. 2CCCh. 18.4 - Prob. 1CCCh. 18.4 - Prob. 2CCCh. 18.5 - How do we estimate a projects unlevered cost of...Ch. 18.5 - What is the incremental debt associated with a...
Ch. 18.6 - Prob. 1CCCh. 18.6 - Prob. 2CCCh. 18.7 - How do we deal with issuance costs and security...Ch. 18.7 - Prob. 2CCCh. 18.8 - When a firm has pre-determined tax shields, how do...Ch. 18.8 - Prob. 2CCCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - Prob. 3PCh. 18 - Prob. 4PCh. 18 - Prob. 5PCh. 18 - Prob. 6PCh. 18 - Prob. 7PCh. 18 - Prob. 8PCh. 18 - Prob. 9PCh. 18 - Prob. 10PCh. 18 - Prob. 11PCh. 18 - Prob. 12PCh. 18 - Prob. 13PCh. 18 - Prob. 14PCh. 18 - Prob. 15PCh. 18 - Prob. 16PCh. 18 - Prob. 17PCh. 18 - Prob. 18PCh. 18 - Prob. 19PCh. 18 - Prob. 20PCh. 18 - Prob. 21PCh. 18 - Prob. 22PCh. 18 - Prob. 23PCh. 18 - Prob. 24PCh. 18 - Prob. 25PCh. 18 - Prob. 26P
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- What is the difference of Cost of Equity and the required rate of return on equities?arrow_forwardWhich of the following risk is affected largely by the debt-to-equity ratio? Liquidity risk Financial risk Management risk Overall Business riskarrow_forwardWhich of the following is not a potential source of financial leverage? Group of answer choices Accounts payable. Long-term debt. Interest payable. Common stock.arrow_forward
- What are the advantages and disadvantages of debt and equity issuance?arrow_forwardWhich of the following is NOT one of the ratios in Internal Liquidity group? Select one: O a. Quick ratio O b. Return on Equity O c. Receivables turnover ratio O d. Current ratioarrow_forwardWhy do analysts need to consider different factors when evaluating a company’s ability to repay short-term versus long-term debt?arrow_forward
- Short-term creditors would probably most interested in which ratio? a. Current ratio c. Debt-to-equity ratio b. Earnings per share d. Quick ratioarrow_forwardDescribe the debt-to-equity ratio and explain how creditors and owners use this ratio to evaluate a company’s risk.arrow_forwardThe debt ratio is used primarily as a measure of: Short-term liquidity. Profitability. Creditors' long-term risk. Return on Investment.arrow_forward
- Why is EBIT generally considered to be independent of financial leverage?Why might EBIT be influenced by financial leverage at high debt levels?arrow_forwardCan the yield on company traded bonds can be used as an estimate for some, or all, of the company’s debt. If not, can credit spreads be obtained from a financial data provider that can be used to estimate the cost of debt?arrow_forwardHow would each of the following scenarios affect a firm's cost of debt, ra(1-T); its cost of equity, s; and its WACC? Indicate with a plus (+), a minus (-), or a zero (0) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion. Probable Effect on ra(1-T) WACC rs a. The corporate tax rate is lowered. b. The Federal Reserve tightens credit. c. The firm uses me debt; that is, it increases its debt ratio. The dividend payout ratio is increased The firm doubles the amount of capital it raises during the year. е. The firm expands into a risky new area. f. The firm merges with another firm whose earnings g. are countercyclical both to those of the first firm and to…arrow_forward
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