Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 9, Problem 3Q
Summary Introduction
To discuss: Indicate the given factors into plus (+), minus (-) or zero (0).
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How would each of the following scenarios affect a firm’s cost of debt, rd( 1 − T); itscost of equity, rs; and its WACC? Indicate with a plus (+), a minus (−), or a zero (0)whether the factor would raise, lower, or have an indeterminate effect on the item inquestion. Assume for each answer that other things are held constant, even though insome instances this would probably not be true. Bo prepared to justify your answerbut recognize that several of the parts have no single correct answer. These questionsare designed to stimulate thought and discussion.
How would each of the following scenarios affect a firm’s cost of debt, kd(1 – T); its cost of equity ke and its WACC? Indicate with a plus sign (+), a minus (-) or a zero if the factor would raise, would lower or would have indeterminate effect on the item in question. Assume for each answer that other things are held constant even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer.
Explain why the required rate of return on a firm's assets must be equal to the weighted average cost of capital associated with its liabilities and equity. Explain using the concepts from the course.
Chapter 9 Solutions
Financial Management: Theory & Practice
Ch. 9 - Define each of the following terms: a. Weighted...Ch. 9 - Prob. 2QCh. 9 - Prob. 3QCh. 9 - Distinguish between beta (i.e., market) risk,...Ch. 9 - Suppose a firm estimates its overall cost of...Ch. 9 - Calculate the after-tax cost of debt under each of...Ch. 9 - LL Incorporateds currently outstanding 11% coupon...Ch. 9 - Duggins Veterinary Supplies can issue perpetual...Ch. 9 - Prob. 4PCh. 9 - Summerdahl Resorts common stock is currently...
Ch. 9 - Booher Book Stores has a beta of 0.8. The yield on...Ch. 9 - Prob. 7PCh. 9 - David Ortiz Motors has a target capital structure...Ch. 9 - A companys 6% coupon rate, semiannual payment,...Ch. 9 - The earnings, dividends, and stock price of Shelby...Ch. 9 - Radon Homes’ current EPS is $6.50. It was $4.42 5...Ch. 9 - Spencer Supply’s stock is currently selling for...Ch. 9 - Prob. 13PCh. 9 - Prob. 14PCh. 9 - On January 1, the total market value of the...Ch. 9 - Suppose the Schoof Company has this book value...Ch. 9 - The following table gives the current balance...Ch. 9 - Start with the partial model in the file Ch09 P18...Ch. 9 - During the last few years, Jana Industries has...Ch. 9 - b. What is the market interest rate on Jana’s...Ch. 9 - Prob. 3MCCh. 9 - d. (1) What are the two primary ways companies...Ch. 9 - What is the estimated cost of equity using the...Ch. 9 - f. What is the cost of equity based on the...Ch. 9 - g. What is your final estimate for the cost of...Ch. 9 - h. Janas target capital structure is 30% long-term...Ch. 9 - i. Use Janas target weights to calculate the...Ch. 9 - Prob. 10MCCh. 9 - k. Should the company use its overall WACC as the...Ch. 9 - l. What procedures can be used to estimate the...Ch. 9 - m. Jana is interested in establishing a new...Ch. 9 - n. What are three types of project risk? How can...Ch. 9 - o. Explain in words why new common stock that is...Ch. 9 - p. What four common mistakes in estimating the...
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Similar questions
- Which of the following best represents the relationship between the weighted average cost of capital (WACC) and the minimum attractive rate of return (MARR)? a. WACC and MARR are unrelated b. WACC is a lower bound for MARR c. WACC is an upper bound for MARR d. MARR ≤ WACC.arrow_forwardWhen 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?arrow_forwardWhich of the following is needed to calculate a firm’s WACC? A. the cost of carrying inventory B. the amount of capital necessary to make the investment C. the cost of preferred stock D. the probability distribution of expected returns E. both b and carrow_forward
- The weights used in calculating the weighted average cost of capital should be based on ________. a book values b estimated future values c market valuesarrow_forward3. Explain the relationship between the weighted average cost of capital (WACC), the maximization of firm value, and financial decision making.arrow_forwardThe appropriate benchmark for the return on equity is: A)the weighted average cost of capital. B)the cost of equity. C)the interest free rate. D)none of the above.arrow_forward
- Is this a right formula? Forward P/E = Market capitalization/ forecasted incomearrow_forwardThe WACC is a weighted average of the costs of debt, preferred stock, and common equity. How should the capital structure weights used to calculate the WACC be determined? Would the WACC depend in any way on the size of the capital budget? How might dividend policy affect WACC? Explainarrow_forward"We can estimate cost of equity using Capital Asset Pricing Model (CAPM)" True Falsearrow_forward
- Which one of the following is most closely related to the net present value profile? A: Payback B: Discounted payback C: Profitability index D: Average accounting return E: Internal rate of returnarrow_forwardBased on the market value ratio, which ratio determine stability, earning power and capital? Explain the formula and its impact & importance. Choose one only.arrow_forwardWhat 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_forward
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