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 28, Problem 26PS
Summary Introduction
To discuss: Some examples of average cost of capital make sense and does not make sense to calculate return on capital.
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What is the effect of an increase in the cost of capital on the payback period, profitability index and accounting rate of return?
Payback period will increase, Profitability will decrease, and Accounting rate of return will increase.
Payback period will not change, Profitability will decrease, and Accounting rate of return will not change.
Payback period will not change, Profitability will increase, and Accounting rate of return will decrease.
Payback period will decrease, Profitability will increase, and Accounting rate of return will decrease.
Consider the table given below to answer the following question.
Asset value
Earnings
Net investment
Free cash flow (FCF)
Return on equity (ROE)
Asset growth rate
Earnings growth rate
Present value
1
2
3
4
5
6
7
8
9.00 10.17 11.49 12.99 14.28 15.71 17.28 18.49
1.17 1.32 1.49 1.69 1.86 1.96 2.07 2.13
1.17 1.32 1.49 1.30 1.43 1.57 1.21 1.29
0.39 0.43 0.39 0.86 0.83
0.13 0.13 0.13 0.125 0.12 0.115
0.13 0.10 0.10 0.10 0.07 0.07
0.13 0.13 0.10 0.06 0.06 0.03
0.13 0.13
0.13 0.13
0.13
Year
Assuming that competition drives down profitability (on existing assets as well as
new investment) to 12.5% in year 6, 12% in year 7, 11.5% in year 8, and 9% in year 9
and all later years. What is the value of the concatenator business? Assume 12% cost
of capital. (Do not round intermediate calculations. Enter your answer in millions
rounded to 2 decimal places.)
million
Assume that each of the following changes is independent (i.e., except for this change, all other factors remain unchanged). In each case. indicate what will happen to the earnings muitiplier and explain why. a. The return on equity increases. b. The debt-equity ratio declines . Overall productivity of capital increases d. The dividend payout ratio declines
Chapter 28 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 28 - Prob. 1PSCh. 28 - Financial ratios Table 28.10 gives abbreviated...Ch. 28 - Performance measures Look again at Table 28.10. At...Ch. 28 - Prob. 5PSCh. 28 - Financial ratios True or false? a. A companys...Ch. 28 - Book rates of return Keller Cosmetics maintains an...Ch. 28 - Prob. 8PSCh. 28 - Prob. 9PSCh. 28 - Prob. 10PSCh. 28 - Prob. 11PS
Ch. 28 - Prob. 12PSCh. 28 - Prob. 13PSCh. 28 - Prob. 14PSCh. 28 - Performance measures Describe some alternative...Ch. 28 - Prob. 16PSCh. 28 - Prob. 17PSCh. 28 - Prob. 18PSCh. 28 - Financial ratios Sara Togas sells all its output...Ch. 28 - Prob. 20PSCh. 28 - Prob. 21PSCh. 28 - Prob. 22PSCh. 28 - Prob. 23PSCh. 28 - Prob. 25PSCh. 28 - Prob. 26PSCh. 28 - Prob. 27PS
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- The ratio that measures how much an investor is willing to pay for a dollar of earnings is known as a _____________ ratio. A. asset management B. market value C. profitabilityarrow_forwardUnder what situation will return on equity be higher than return on investment? a. When assets exceed liabilities. b. When the debt to equity ratio is greater than 1.0. c. When net income is higher than it was in the previous year. d. When a company earns more on borrowed money than the interest it must pay.arrow_forwardWhich of the following statements are not true Select one: a. Profitability Index is a discounted technique b. Capitalisation are the total securities issued by a company c. Cash flows occurs over a series of years in capital budgeting decisions d. Some investment decisions are irreversible e. Borrowing is cheap compared to equityarrow_forward
- Consider the role of financial statement analysis in an efficient capital market, and review empirical evidence on the association between changes in earnings and changes in stock pricesarrow_forwardWhich of the following is the correct statement about the inflation figure that is included in the money cost of capital? a. It is expected general inflation suffered by the investors b. It is historic general inflation suffered by the investors c. It is historic and specific to the business d. It is expected and specific to the businessarrow_forwardYou wish to compute a firm's sustainable growth rate from its accounting statements. To do so, you could use the values of: Question 3 options: A) Total assets, net income, and the retention ratio. B) Net income, equity, and total assets. C) Net income, equity, and the dividend payout ratio. D) Interest paid, equity, and total assets. E) Total assets, interest paid, and equity.arrow_forward
- Answer quickly please The _________ is the internal rate of return a firm must earn on its investment in order to maintain the market value of its stock. a. IRR b. net profit margin c. Cost of Capital d. gross profit marginarrow_forwardWhich of the following is not true about the information provided in the income statement? OIt helps in evaluating the past performance of the enterprise. O It provides a basis for predicting future performance. It helps assess the risk or uncertainty of generating future cash flows. O It helps in evaluating working capital.arrow_forwardNonearrow_forward
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