Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 21.5, Problem 2CC
The fact that equity is a call option on the firm’s assets leads to what agency costs?
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Need the WACC %
WACC and Optimal Capital Structure
F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows:
Market Debt-to-Value Ratio (wd)
Market Equity-to-Value Ratio (ws)
Market Debt-toEquity Ratio (D/S)
Before-Tax Cost ofDebt (rd)
0.0
1.0
0.00
6.0
%
0.10
0.90
0.1111
6.4
0.20
0.80
0.2500
7.0
0.30
0.70
0.4286
8.2
0.40
0.60
0.6667
10.0
F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 5%, the market risk premium is 7%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 1.4. Based on this information, what…
Ned's Co. has an average collection period of 45 days and an operating cycle of 130 days. It has a policy of keeping at least $10 on hand as a minimum cash balance, and has a beginning cash balance for the first quarter of $20. Beginning receivables for the quarter amount to $35. Sales for the first and second quarters are expected to be $110 and $125, respectively, while purchases amount to 80% of the next quarter's forecast sales. The accounts payable period is 90 days. What are the cash disbursements for the first quarter?
Question 4 options:
$92
$88
$76
$100
$110
Liberal credit terms for customers is associated with a restrictive short-term financial policy.
Question 3 options:
True
False
Chapter 21 Solutions
Corporate Finance
Ch. 21.1 - What is the key assumption of the binomial option...Ch. 21.1 - Why dont we need to know the probabilities of the...Ch. 21.1 - Prob. 3CCCh. 21.2 - What are the inputs of the Black-Scholes option...Ch. 21.2 - What is the implied volatility of a stock?Ch. 21.2 - How does the delta of a call option change as the...Ch. 21.3 - What are risk-neutral probabilities? How can they...Ch. 21.3 - Does the binominal model or Black-Scholes model...Ch. 21.4 - Is the beta of a call greater or smaller than the...Ch. 21.4 - What is the leverage ratio of a call?
Ch. 21.5 - Prob. 1CCCh. 21.5 - The fact that equity is a call option on the firms...Ch. 21 - The current price of Estelle Corporation stock is...Ch. 21 - Using the information in Problem 1, use the...Ch. 21 - Suppose the option in Example 21.11 actually sold...Ch. 21 - Eagletrons current stock price is 10. Suppose that...Ch. 21 - What is the highest possible value for the delta...Ch. 21 - Hema Corp. is an all equity firm with a current...Ch. 21 - Consider the setting of Problem 9. Suppose that in...Ch. 21 - Roslin Robotics stock has a volatility of 30% and...Ch. 21 - Rebecca is interested in purchasing a European...Ch. 21 - Using the data in Table 21.1, compare the price on...Ch. 21 - Consider again the at-the-money call option on...Ch. 21 - Harbin Manufacturing has 10 million shares...Ch. 21 - Using the information on Harbin Manufacturing in...Ch. 21 - Using the information in Problem 1, calculate the...Ch. 21 - Prob. 23PCh. 21 - Prob. 24PCh. 21 - Calculate the beta of the January 2010 9 call...Ch. 21 - Consider the March 2010 5 put option on JetBlue...
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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
- An accounts payable period decrease would increase the length of a firm's cash cycle. Consider each in isolation. Question 6 options: True Falsearrow_forwardWhich of the following is the best definition of cash budget? Question 10 options: Costs that rise with increases in the level of investment in current assets. A forecast of cash receipts and disbursements for the next planning period. A secured short-term loan that involves either the assignment or factoring of the receivable. The time between sale of inventory and collection of the receivable. The time between receipt of inventory and payment for it.arrow_forwardShort-term financial decisions are typically defined to include cash inflows and outflows that occur within __ year(s) or less. Question 9 options: Four Two Three Five Onearrow_forward
- A national firm has sales of $575,000 and cost of goods sold of $368,000. At the beginning of the year, the inventory was $42,000. At the end of the year, the inventory balance was $45,000. What is the inventory turnover rate? Question 8 options: 8.46 times 13.22 times 43.14 times 12.78 times 28.56 timesarrow_forwardThe formula (Cash cycle + accounts payable period) correctly defines the operating cycle. Question 7 options: False Truearrow_forwardAn accounts payable period decrease would increase the length of a firm's cash cycle. Consider each in isolation. Question 6 options: True Falsearrow_forward
- Which of the following issues is/are NOT considered a part of short-term finance? Question 5 options: The amount of credit that should be extended to customers The firm determining whether to issue commercial paper or obtain a bank loan The amount of the firms current income that should be paid out as dividends The amount the firm should borrow short-term A reasonable level of cash for the firm to maintainarrow_forwardLiberal credit terms for customers is associated with a restrictive short-term financial policy. Question 3 options: True Falsearrow_forwardAn increase in fixed assets is a source of cash. Question 2 options: True Falsearrow_forward
- If the initial current ratio for a firm is greater than one, then using cash to purchase marketable securities will decrease net working capital. True or falsearrow_forwardwhat is going to be the value of American put option that expires in one year modeled with a binomial tree of 3 months step with year to expiry? assume the underlying is oil future with RF of 5% and vol of oil is 30%. Strike is 70 and price is 60 of oil. 13.68 13.44 13.01arrow_forwardhello tutor need step by step approach.arrow_forward
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