Increased leverage will decrease the WVACC. An increase in leverage will be offset by a decrease in equity financing, thus leaving WACC unchanged. Increased leverage will increase the WACC. Changes in leverage will affect the WACC only if the interest rate on debt changes.
Q: The table shows some Price Real price beef prices (1982-1984 cents per (cents per pound) and the CPI...
A: Let P = Nominal price CPI = CPI index R = Real price
Q: As Financial Manager what would be your decision on assets and investment matters to meet profit max...
A: Profit maximization is considered as a goal of financial management. It aims at getting higher profi...
Q: We've found that the total value of VetaTaco is $2 million. The firm has $600,000 of debt financing....
A: Total value (V) = $2,000,000 Debt value (D) = $600,000 Equity value (E) = $2,000,000-600,000 = $1400...
Q: emand loan was paid off with payments of $3,000 on April 10th, $2,000 on September 25th and a final ...
A: loans are paid by the installment payment and these are paid by the payment that carry the payment f...
Q: NPV of the project
A: Net present value shows the difference between the present value of cash flow and the present value ...
Q: Office of Business Administration tells you that Villa Apartment has a project to expand the current...
A: NPV is the difference between present value of cash inflows and initial investment. NPV =PV of all c...
Q: 2. A financial manager must choose between three alternative investments. Each asset is expected to ...
A: Wealth maximization is the concept of maximizing the value of the shares held by the shareholder, to...
Q: 11. You want to start saving for your 10 year old son's college education. If you are guaranteed 13%...
A: Solution:- We know, when an equal amount is saved each year, it is called annuity. Also, future val...
Q: Katy invests $13,000 at 6% simple interest for 38 years. Round your answers to the nearest cent. How...
A: Here, Investment Amount (P) is $13,000 Simple Interest Rate (R) is 6% Time Period of Investment (T) ...
Q: he dividend per share was 27 last year while the current market price of the shares is 135. The grow...
A: The return required by a business for an investment or project, or by an individual for an equity in...
Q: Find the compound amount and compound interest in Php62,000 at the end of 3 years at 8% compounded q...
A: As you have asked multiple questions, we will solve the first question as per the policy presented b...
Q: Which alternative offers you the highest effective rate of return?
A: Investment appraisal is the method of evaluating and selecting investments from various investment o...
Q: Assets (in KD) Liabilities (in KD) Cash 20000 Accounts payable 80000 Accounts receivable 100000 Accr...
A:
Q: Calculating the risk premium on bonds The text presents a formula where (1+) = (1-pX1+i+x)+ p(0) whe...
A: In the given formula:(1+i)= (1-p)(1+i+x)+p(0)a) Rate of interest on risky bond , when the probabili...
Q: Adil is paid a commission amount of 2280 RO. During January 2020, his sales were 38,000 RO. What is ...
A: Commission is the amount paid to the salesperson or agent in exchange of services provided by such i...
Q: Show the cash flow diagram and solutions. A bank give a certain interest rate compounded semiannual...
A: Here, Present value = Php 7,000 Future value at the end of 12 years = Php28,000 Number of years = 12...
Q: The cost of a merger may outweigh the potential gain if the: present value of the acquired firm exce...
A: Cost of merger will be Cost of merger =Market value of target company-intrinsic value of target com...
Q: Explain the essence of the binomial model for calculating the value of call and put options. Provide...
A: The binomial option pricing model is a method for valuing options that was created in 1979 by y John...
Q: LTV O LTV = Loan÷DCR %3D O LTV = Loan÷Debt Service
A: In finance LTV refers to loan to value ratio. It is an important metric that is looked at in case of...
Q: Individual Assessment 1.a: Simple Ordinary Annuity Directions: Calculate the future value of #1, 2, ...
A: Future value includes the deposits made and the interest accumulated and present value includes the ...
Q: Referring to balance sheet and income statement of Sitra Co. below, prepare the cash flow from opera...
A: Cash flow statement: Cash flow statement is one of the important and mandatory reports from the comp...
Q: Howard is saving for a long holiday. He deposits a fixed amount every month in a bank account with a...
A: Effective interest rate is 7.9% Future Value is $11,000 Time period is 5 years or 60 months To Find:...
Q: 10. An elective project is currently under review. The first alternative requires an initial investm...
A: Here, MARR is 10% Time Period for both Alternative is 6 years Details of First Alternative: Initial ...
Q: ndholders. areholders. areholders and the federal government.
A: Interest tax sheild is the reduced cost of capital due to the advantages of tax deductions.
Q: What is the current price of a 10% coupon bond (with standard semiannual payments) if the yield-to-m...
A: Part 1: Coupon rate = 10% Yield to maturity = 5% Maturity time period = 2 years Face value = $1,000
Q: You are considering two ways of financing a spring break vacation. You could put it on your credit c...
A: The option with lower effective annual rate should be chosen.
Q: Calculate the amount of money Dylan had to deposit in an investment fund growing at an interest rate...
A: Interest rate = 2% Annuity amount = $11,000 Time period = 2 years
Q: Suppose stock returns have a 2-factor structure. You observe a broad stock market portfolio A which...
A: Portfolio A return (Ra) = 7.4% Portfolio B return (Rb) = 10.6% Beta of first factor for A (A1) = 0.5...
Q: Garrick is purchasing equipment for his job as a builder. The equipment costs $1000 and he wants to ...
A: The loan which is discharged by making installment payments consist of two components as interest mo...
Q: Difficulties arise with the use of IRR for investment appraisal where: There is more than one sign c...
A: IRR or Internal Rate of Return is an investment appraisal tool. It is the rate at which the NPV of a...
Q: What is the accumulated value of deposits of $1020.00 made at the end of every six months for three ...
A: Accumulated deposits include the amount deposited and compounding interest accumulated over the peri...
Q: For each of the companies described here, would you expect it to have a low, medium, or high dividen...
A: As you have asked a question with multiple parts, we will solve the first 3 parts as per the policy ...
Q: Synovec Corporation is expected to pay the following dividends over the next four years: $6.10, $17....
A: The stock price which is the maximum price to be paid for share consists of dividends and terminal v...
Q: Fritz buys a car costing $24,300. He agrees to make payments at the end of each monthly period for 8...
A: A loan is an agreement between two parties where a sum is forwarded in return for periodic payments ...
Q: Chipotle has $2,500 million in assets, consisting of $1,055 million in debt, $1,445 million in equit...
A:
Q: Critically analyze concepts behind MBSs and how risk was diversified to secure lending. Analyze what...
A: Concept of Mortgage Backed Security A mortgage-backed security (MBSs) is an investment which is simi...
Q: erm in years: 2 3 4. Cate: 1.8% 2.25% 2.30% 2.66% 3.13% he table above shows the interest rates avai...
A: Present value of cash flow is the value of cash flow that is equivalent to the value today consideri...
Q: A company issued 10000, 10% debentures of 100 each on 1st April, 2003 to be matured on 1st April, 20...
A: Market price = 80 Tax rate = 35% Face Value = 100 Coupon = Coupon Rate * Face Value = 10%*100 = 10 N...
Q: Capital structure of a company is more appropriately calculated using the: book value of debt and eq...
A: Capital structure of a company consists of debt, equity or any other source of finance used to finan...
Q: How much money should you invest at an interest rate of 6% compounded monthly, to have P400,000 in 5...
A: Present Value can be calculated using PV function in excel PV (rate, nper, pmt, [Fv], [type]) Rat...
Q: Ethan wants to set up a fund for his son's education such that he could withdraw $2,982.00 at the be...
A: Quarterly withdrawal (Q) = $2982 Number of withdrawals (n) = 6 years = 24 quarters Interest rate = 2...
Q: What will be the interest rate per interest period if convert to compounding monthly? 1.9967% ...
A: Effective annual rate (EAR) refers to a real interest rate which an investor is expect from his inve...
Q: Compute for the Effective Interest Rate Payment Period = Monthly 10% Compounded Yearly = 10% Compou...
A: The effective interest rate is the interest rate considering the effect of compounding.
Q: What is the impact of annuity dues in consideration to business matter?
A: An annuity due is one whose payment is due right away at the start of each period and the difference...
Q: The future value of an investment increases as the number of periods increases True or Fase
A: Future value means the value of investment after x period of time compounded at the interest rate.
Q: Mezzanine Debt is generally collateralized by O A first deed of trust O A high rate of interest O A ...
A: Mezzanine debt is a financing instrument which is a hybrid of debt and equity. It has higher risk th...
Q: Company A has identified the following capital investment project Time 0 Time 1 Time 2 Cash flows (€...
A: The Profitability Index is one of the capital budgeting techniques that take into consideration the ...
Q: 3. The required rate of return, assuming no inflation, is 12%, the sales price of a particular p...
A: Solution:- We know, nominal discount rate is the discount rate after the effect of inflation in the ...
Q: Prepare a schedule for the following bond, including calculations, yearly income, end-of-year accumu...
A: Given:
Q: What will be the interest rate per interest period if convert to compounding monthly? 1.9967% ...
A: Effective annual rate (EAR) refers to the rate of interest which is an outcomes of compounding inter...
Step by step
Solved in 2 steps
- What happens to ROE for Firm U and Firm L if EBIT falls to $1,600? What happens if EBIT falls to $1,200? What is the after-tax cost of debt? What does this imply about the impact of leverage on risk and return?Which one of the following factors would likely cause a firm to increase its use of debt financing as measured by the debt to total capital ratio? A.Increased economic uncertainty. B.An increase in the degree of operating leverage. C.An increase in the corporate income tax rate. D.An increase in the price-earnings ratio.Which of the following makes this a true statement? In this slightly more realistic world with corporate taxes, managers can: Multiple Choice maximize the firm's value by taking on as much equity as possible. maximize the firm's value by taking on as much debt as possible. minimize the firm's value by taking on as much debt as possible. maximize the firm's value by financing only with debt.
- 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?Which of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.Which of the following is a valid reason for a firm not to use as much debt as it can raise? Group of answer choices The use of more debt is expected to result in an increase in the firmʹs cost of capital when everything is considered More debt will increase the firmʹs riskiness All of them are valid reasons for a firm to use less debt than might be available The use of more debt is expected to result in a lower price/earnings ratio
- Regarding the EPS fallacy, which of the following statements is correct: a. When a company issues debt and uses all the proceeds to buy back equity and as a result EPS rises, the fact that some analysts associate the rise of EPS to an improvement in the company's performance is called the EPS fallacy. b. All given statements are correct. c. One of the reasons behind the EPS fallacy is not to take into account that when EPS rises mechanically due to a leveraged recapitalisation, the cost of equity also rises in the same proportion and the share price does not change (assume no taxes and perfect capital markets world). d. Suppose companies A and B have identical cash flows but different capital structures. Suppose further that EPS(A) > EPS(B). We cannot conclude that A has a better performance than B.Suppose that a new government is elected and it changes the law applying to firms to:• Allow dividend payments to be tax deductible• Stop interest expense on debt from being tax deductibleHolding other factors constant, and assuming that firms seek to maintain an optimal capital structure in accordance with trade-off theory, what would you expect to happen to the debt ratio of a firm with both equity and debt in its capital structure?a. An increase in the debt ratiob. A decrease in the debt ratioc. The debt ratio would be unchangedd. The debt ratio would doublee. None of the above or it is not possible to sayWhich statement about capital structure is the most correct? a. The more the company borrows, the lower will be the after-tax WACC. This increases the present value of the firm free cash flows which represents the value of the levered firm. Therefore, a firm should always seek to borrow as much debt as possible. b. The more the company borrows, the higher will be its tax shields, therefore a company will always prefer to issue debt than equity. c. Because the cost of debt is cheaper than the cost of equity, a company should use as much debt as possible to finance their projects d. Lenders rank ahead of shareholders when the company goes bankrupt. This increased risk for shareholders means the cost of equity is higher than the cost of debt. e. A company should always try to reduce its debt because of the high bankruptcy risk associated with debt. A company should aim to have 100% equity financing if it is possible.
- Which of the following would reduce a firm's WACC after tax? a. A firm invests in an average-risk project using equity, rather than debt financing. b. A supermarket chain decides to establish hardware stores which increases its systematic risk. c. A firm issues shares and uses the proceeds to pay off a bank loan. d. A firm issues bonds and uses the proceeds to repurchase stock. e. A firm significantly improves its operating cost control to boost profits.Which of the following statements is CORRECT? Group of answer choices Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes. If a company assigns the same cost of capital to all of its projects regardless of each project’s risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject. Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt. Higher flotation costs tend to reduce the cost of equity capital.Under the trade-off theory, lowering the corporate tax rate will incentivize companies to increase the ratio of debt in their capital structure. Question options: a) True b) False
