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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Textbook Question
Chapter 4, Problem 21PS
- a. r = DIV1/P0 + 8
- b. r = EPS1/P0
For each formula, construct a simple numerical example showing that the formula can give wrong answers and explain why the error occurs. Then construct another simple numerical example for which the formula gives the right answer.
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The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because ofa. leverageb. solvencyc. Yieldd. quick assets
What 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 firm
Based on the Liquidity ratio, which ratio determine stability, earning power and capital? Explain the formula and its impact & importance. Choose one only.
Chapter 4 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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- What are the multiplier ways to calculate the cost of equity? Why are there multiply ways to calculate cost of Equity? Do they all give the same result? Why or Why not? Are all three ways equally valid for all firms?arrow_forwardWhich of the following is NOT a profitability ratio? Select one:a. Return on Equityb. Net Profit Marginc. Return on Assetsd. Average Collection Periodarrow_forward1.Which of the following is not something that you would consider when evaluating the optimal capital structure? d. Security Rating. b. EBIT-EPS Analysis. a. Agency Costs. f. Neither the second nor fourth answer is correct. c. Taxes. e. All of the above are considered when determining the optimal capital structure. 2.Which of the following is an argument for the relevance of dividends? b. Reduction of uncertainty. a. Informational content. c. Some investors' preference for current income. d. All of the above. 3.All of the following are true of stock splits EXCEPT: a. Market price per share is reduced after the split. d. Proportional ownership is unchanged. b. The number of outstanding shares is increased. c. Retained earnings are changed.arrow_forward
- Which of the followings is not one of the components of ROE under the Du Pont analysis/identity? Select one:a. Profitabilityb. Efficiencyc. Liquidityd. Equity multiplierarrow_forwardAnswer the following question in essay. What do you understand by current ratio? What are it uses? What are its limitations? Ratio analysis is widely used as a tool of financial analysis, yet it suffers from various limitations. Explain. How can solvency of a firm be measured? What you understand by Liquidity ratios? Discuss their significance. Page 1 Module PSFM08 MANAGERIAL ACOUNTING WITH FINANCIAL ANALYSIS AND REPORTING Explain the importance of profitability ratio. How they are worked out?arrow_forwardFor purposes of computing the WACC, if the book value of equity exceeds the market value of equity, then: the market value of equity should be used. the book value of equity should be used. the market value of equity less retained earnings should be used. the book value of equity less retained earnings should be used.arrow_forward
- Higher the ratio, the more favorable it is, doesn’t stand true for Select one: a. Net profit ratio b. Operating ratio c. Liquidity ratio d. Stock turnover ratioarrow_forwardWhich of these would best improve a firm's liquidity position? *a. Lower profitabilityb. Higher capital spendingc. Higher need for noncash current assets on the balance sheetd. Declaration of stock dividendsarrow_forwardThe price/earnings ratio is commonly used by investors to OA. evaluate their ability to earn a return on their investment OB. determine the market value of the company OC. determine the market price per share of stock of a company OD. determine if the company has a low amount of debtarrow_forward
- 3) Consider a firm with capital from debt, preferred stock, and common equity in its capital structure. You are given that ra (1-T) = after-tax cost of debt, r, = cost of internal equity, and WACC = weighted average cost of capital. Which of the following statements is correct? (">" represents "greater than") A) r. > WACC > ra (1-T). B) ra (1-T) > rs > WACC. C) r. > ra (1-T) > WACC. D) WACC > rs > ra (1-T). WACKarrow_forwardExplain the four main equity valuation ratios where “Price” is the numer-ator. Give one positive AND negative consideration to using each ratio in financial analysis.arrow_forwardThe cost of equity is _______. A. the interest associated with debt B. the rate of return required by investors to incentivize them to invest in a company C. the weighted average cost of capital D. equal to the amount of asset turnoverarrow_forward
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