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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Question
Chapter 29, Problem 11PS
a)
Summary Introduction
To determine: The maximum possible growth rate if no external debt or equity is to be issued.
b)
Summary Introduction
To determine: The maximum possible growth rate if the firm maintains a fixed debt ratio but issues equity.
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Students have asked these similar questions
A6)
Finance
1. What of the following statements is not correct? _____
the higher the sales growth rate g is, the larger AFN will be—other things held constant.
The higher the capital intensity ratio, the larger AFN will be—other things held constant.
The higher the firm’s spontaneous liabilities, the smaller AFN will be—other things held constant.
The higher the payout ratio, the larger AFN will be if other things held constant.
Use the following information to value a firm’s assets.
Assume the following:
the market value of the firm's assets is expected to remain constant over time so the firm doesn't grow and can be valued as a level perpetuity,
the firm has a constant debt-to-assets ratio,
the bonds are priced at par, and
the stock's expected capital returns are zero.
Relevant data:
The number of shares on issue is 1 million and the number of bonds is 800,000
The constant annual dividend per share is $3
The bonds have an annual fixed coupon payment of $2.50
10-year government bonds have a yield of 2% and the market risk premium is 5%
The beta of levered equity is 1.2
The beta of the bonds is 0.9
Which of the following is the market value of the levered firm’s assets?
a.
$68.3 million
b.
$21.2 million
c.
$70.1 million
d.
$42.9 million
e.
$54.7 million
A problem of financing with debt (
bonds) is that Group of answer
choices the price of new bond
offerings is uncertain they require a
higher rate of return You have to be
able to pay the interest to remain
solvent the dividend rate has to have
annual growth
Chapter 29 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 29 - Prob. 1PSCh. 29 - Prob. 2PSCh. 29 - Sources and uses of cash and working capital...Ch. 29 - Sources and uses of cash State whether each of the...Ch. 29 - Prob. 5PSCh. 29 - Forecasts of payables Dynamic Futon forecasts the...Ch. 29 - Prob. 8PSCh. 29 - Prob. 9PSCh. 29 - Prob. 10PSCh. 29 - Prob. 11PS
Ch. 29 - Cash cycle A firm is considering several policy...Ch. 29 - Prob. 13PSCh. 29 - Collections on receivables If a firm pays its...Ch. 29 - Short-term financial plans Which items in Table...Ch. 29 - Prob. 16PSCh. 29 - Short-term financial plans Work out a short-term...Ch. 29 - Prob. 18PSCh. 29 - Prob. 19PSCh. 29 - Long-term financial plans Corporate financial...Ch. 29 - Prob. 21PSCh. 29 - Long-term financial plans a. Use the Dynamic...Ch. 29 - Long-term plans The financial statements of Eagle...Ch. 29 - Forecast growth rate a. What is the internal...Ch. 29 - Forecast growth rate Bio-Plasma Corp. is growing...Ch. 29 - Long-term plans Table 29.19 shows the 2016...
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Similar questions
- This question is related to Chapter 18 of Berk & Demarzo "Capital Budgeting and Valuation with Leverage". How do the calculations of the firm value using the APV method differ between the following assumptions? The growth rate of the EBIT and the debt-equity ratio will be constant The growth rate of the EBIT and the interest coverage ratio will be constant. The firm selects the optimal interest coverage ratio and maintains this ratio constant forever (corporate taxes are the only imperfection) Are the values that result different or equal?arrow_forwardAnswer the following a) When will the different DCF methods use the same discount rate? b) The cost of debt (ka) will change as the capital structure of a firm changes. Why or why not? c) Why does the cost of equity (k.) increase as the amount of debt in the capital structure of a firm increases? Why? d) Freebie Inc.'s common stock has a beta of 1.3. If the risk-free rate is 4.5% and the expected return on the market is 12%, what is its cost of equity capital? e) Why do branded food companies command the highest EBIT multiple (about 8) and transportation companies the lowest (about 3)? f) Should a firm use its cost of capital as a hurdle/discount rate to value all internal divisions? Why or why not? g) An option can have more than one source of value. Consider a mining company. The company can mine for ores today or wait another year (or more) to mine. What real options can you identify here? h) Do you consider dividend payments by the firm in calculating cash flows? Why or why not? i)…arrow_forwardEf 42.arrow_forward
- What is the difference in the interest rates on commercial paper for financial firms versus nonfinancial firms? Explain possible reasons for the difference. What is the most recent interest rate reported for, 1-year, 2-year, 5-year, 10-year, and 30-year maturity Treasuries? Provide the graph of the rates over the maturity (the yield curve) and interpret the shape of the yield curve. 2. The most famous financial market in the world is the New York Stock Exchange (NYSE). Visit the NYSE website and then answer the following questions: ● What is the mission of the NYSE? ● What would be the fee for a firm with five million common shares outstanding?arrow_forwardWhich of the following statements is not correct? The higher the sales growth rate g is, the larger AFN will be—other things held constant. The higher the capital intensity ratio, the larger AFN will be—other things held constant. The higher the firm’s spontaneous liabilities, the smaller AFN will be—other things held constant. The higher the payout ratio, the smaller AFN will be if other things held constant.arrow_forwardProvide the correct accurate answerarrow_forward
- Estimating growth rates It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach. In general, there are three available methods to generate such an estimate: • Carry forward a historical realized growth rate, and apply it to the future. • Locate and apply an expected future growth rate prepared and published by security analysts. • Use the retention growth model. Suppose Grant is currently distributing 40% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 22%. Grant's estimated growth rate is %.arrow_forwardAttempt if you can provide correct answerarrow_forwardPlease see image to answer question. The options for F are as follows;The firm should proceed with the recapitalization.The firm should not proceed with the recapitalization.arrow_forward
- Nonearrow_forwardConsider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%. a. What are the possible payoffs to the equityholders at date 1? What kind of financial product has the same payoffs? Please describe the detailed characteristics of the financial product. b. What are the possible payoffs to the bondholders at date 1? Are they riskfree? What kind of financial product/portfolio has the same payoffs? Please describe the detailed characteristics of the financial product/portfolio.arrow_forwardIs it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms? Calculate the expected rate of return and standard deviation for each investment. Which investment would you prefer?arrow_forward
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