Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 19.4, Problem 2CC
Summary Introduction
To discuss: The ways to estimate the unlevered cost of capital of the firm using the data from the comparable publicly traded firms.
Introduction:
The risk associated with the firm and the cost of capital has to be estimated to value the investments of the firm. The one of the most important method to value the cost of capital is
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When estimating a weighted average cost of capital, a firm can use either book values or market values for estimating the value of the component sources of capital. Where would you find book values, and what value do they represent? How would you calculate market values? In general, would you prefer to use market or book values for estimating the WACC? Under what circumstances would you use book values?
Why are capital market data and information useful when a firm is considering its cost of capital?
What weights should be used when you calculatethe WACC? Discuss the choice between book value and market value weights, and the role of the“target” capital structure for a firm whose actualcapital structure is far removed from the target.
Chapter 19 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 19.1 - Prob. 1CCCh. 19.1 - Prob. 2CCCh. 19.2 - Prob. 1CCCh. 19.2 - Prob. 2CCCh. 19.3 - What is a pro forma income statement?Ch. 19.3 - Prob. 2CCCh. 19.4 - Prob. 1CCCh. 19.4 - Prob. 2CCCh. 19.5 - Prob. 1CCCh. 19.5 - Prob. 2CC
Ch. 19.6 - Prob. 1CCCh. 19.6 - Prob. 2CCCh. 19 - Prob. 1PCh. 19 - Prob. 2PCh. 19 - Prob. 3PCh. 19 - Prob. 4PCh. 19 - Under the assumptions that Idekos market share...Ch. 19 - Prob. 6PCh. 19 - Prob. 7PCh. 19 - Prob. 8PCh. 19 - Prob. 11PCh. 19 - Calculate Idekos unlevered cost of capital when...Ch. 19 - Using the information produced in the income...Ch. 19 - How does the assumption on future improvements in...Ch. 19 - Approximately what expected future long-run growth...Ch. 19 - Prob. 16P
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- Which 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_forwardWhat is one classification scheme that firms often use to obtain risk-adjusted costsof capital?arrow_forwardHow do free cash flows and the weighted averagecost of capital interact to determine a firm’s value?arrow_forward
- Should firms focus on book value or market value capital structures? How would the calculatedWACC be affected by the use of book weightsrather than market weights?arrow_forwardWhat is WACC (select all that are true)? Group of answer choices Rd (1-Tc) * D/V + Re * E/V Weighted Average Cost of Capital For a firm overall, it is based on the riskiness of the firm's assets While it is generally estimated by looking at the right-hand-side of the balance sheet, it is largely driven by the left-hand-side (i.e., assets) It is the amount that equity holders demand for an investment in a firm It is the amount that debt holders demand for a loan made to the firmarrow_forwardHow do “windows of opportunity” impact a firm’s capital structure?arrow_forward
- Discuss the main difficulties that are faced in calculating an appropriate cost of capital using models like the dividend growth model or capital asset pricing model, and the particular problems of estimating a cost of capital for unquoted companies.arrow_forwardFor an unlevered firm, the cost of capital can be determined by using the ________. A. Preferred stock yield B. Yield to maturity on the traded debt C. Capital Asset Pricing Model D. Dividend yieldarrow_forwardAccording to the trade-off model of capital structure, why is there an optimal capital structure for a particular firm?arrow_forward
- What rate do investors use to discount the capital gains and cash flows of firms?arrow_forwardd) The cost of capital is sometimes referred to as the discount rate or the opportunity cost. What role does it play in the long-term investment decisions of any firm?arrow_forwardWhat are we referring to when we discuss the “optimal capital structure” of a business? Why is the optimal capital structure also referred to as the “target capital structure”?arrow_forward
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