Business

FinanceQ&A LibraryThe equity versus debt decision relies on a large number of factors such as the existing capital structure of the business, the current economic state and the business life cycle stage (CFI,2019). And the best capital structure for a business is the capital structure that minimizes the business’s WACC. To be more specific, the cost of equity is higher compared to the cost of debt since the investors take more risk when purchasing a company’s stock compared to purchasing a company’s bond. Thus, financing purely with equity will lead to high WACC. In that case which one do you think will be more efficient in maximizing the firm value?Start your trial now! First week only $4.99!*arrow_forward*

Question

The equity versus debt decision relies on a large number of factors such as the existing capital structure of the business, the current economic state and the business life cycle stage (CFI,2019). And the best capital structure for a business is the capital structure that minimizes the business’s WACC. To be more specific, the cost of equity is higher compared to the cost of debt since the investors take more risk when purchasing a company’s stock compared to purchasing a company’s bond. Thus, financing purely with equity will lead to high WACC. In that case which one do you think will be more efficient in maximizing the firm value?

Tagged in

Business

Finance

Find answers to questions asked by students like you.

Q: Produce a projected capital budgeting cash flow statement for the Sneaker 2013 project Answer the fo...

A: To calculate net cash flows, one needs to ascertain net income. Following steps have been attached t...

Q: Questions are on image

A: (1)Computation of closing stock and cost of goods sold is as follows:Calculation:Therefore, the valu...

Q: Question 2. Suppose the current ZCB prices for maturity in two years and in five years are 0.8 and 0...

A: If Pn is the price of ZCB with maturity of n years and Sn is the spot rate for year n then,Pn = (1 +...

Q: Standsard revenue bonds are: A. Backed by the full taxing authority of the municipality. B. Collate...

A: The correct answer is option (b).The revenue bond is defined as a use of proceed revenue bond which ...

Q: "Assume you graduate with $31,300 in student loans with an interest rate of 5.25% compounded annuall...

A: The loan amount consists present value of all future payments.It is given that,Loan amount is $31,30...

Q: What is Internal Rate of Return - All Cash Deal? Please provide examples

A: Internal Rate of Return (IRR)IRR is the annualized effective compounded rate or return that can be e...

Q: Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this c...

A: The rate of return that an investor expects from the investmnet made is known as expected rate of re...

Q: Calculate the amount of money that Emily needs to set aside from her bonus this year to cover the do...

A: We need to use the concept of time value of money to solve the question. According to the concept of...

Q: Madoff Corporation raised money through a bond issue with a total principal value of $3,000,000. Eac...

A: a.The formula to calculate coupon payment received by bondholders is given below:

Q: 9. A passbook savings account has a rate of 6%. Find the effective annual yie if the interest is com...

A: I am solving the first question, that is Q - 9.

Q: Suppose that 10 years ago you bought a home for $150,000, paying 10% as a down payment, and financin...

A: Calculation of Monthly Payment:The monthly payment is $710.04.Excel Spreadsheet:

Q: A five-year project has an initial fixed asset investment of $280,000, an initial NWC investment of ...

A: Equivalent Annual Cost (EAC) is the cost of owning an asset. It is used as an important tool for eva...

Q: A certain investment will require an immediate cash outflow of $4m. At the end of each ofthe next 4 ...

A: PART A & B:Calculation of Net Present Value:The real interest rate of 5% in Part B is calculated...

Q: Atlantic Corporation is the largest logging company in the north eastern part of the United States. ...

A: Last years dividend = D0 = $ 5 per shareGrowth rate in dividend, g = -5%Ke = the required rate of re...

Q: What are the key points to consider when describing a firm's payout?

A: Meaning of dividend pay-out:The pay-out ratio shows the share of earnings paid out to shareholders a...

Q: ncome Statement Bullseye, Inc.'s 2008 income statement lists the following income and expenses: EBIT...

A: earnings per share = EPS = Net income / Number of shares outstandingNet income = EBIT - Interest - T...

Q: What is Ratio Analysis? Briefly explain

A: Ratio Analysis: It is the procedure of analyzing and looking at money related data by determining im...

Q: Financial analysts forecast Limited Brands (LTD) growth rate for the future to be 12.5 percent. LTD’...

A: Gordon growth model states that the price or value of a stock can be determined if the firm continue...

Q: The Price-Earning ratio (P/E) of stock A, B, C are 5, 3, 7 respectively. Which one you should buy?

A: A Price-earnings ratio is the relationship between firm's stock price and earnings per share. The hi...

Q: Thank you for answering question 3. I need the answers to 4 and 5 as well because the cash flows are...

A: 4.Computation of NPV:

Q: What is calculation of before Tax (Equity) Cash Flow? Please provide example.

A: The cash flow, which is generated by an investment after deducting all payments of all expenses from...

Q: A pension fund manager is considering three mutual funds. The first is a stock fund, the second is ...

A: Calculation of Expected Return, Standard Deviation, Sharpe Ratio, Weight of Stock and Weight of Bond...

Q: The Lake Placid Town Council has decided to build a new community center to be used for conventions ...

A: a)Expected value approach: Excel computation: (In thousand dollars)The medium or large can be select...

Q: You have a loan outstanding. It requires making five annual payments of $7,000 each of the end of th...

A: In order to remain indifferent between the two options,One large payment at the end of the loan’s te...

Q: Discuss the topic of maximizing shareholder wealth. This topic has been researched and studied for m...

A: Shareholders wealth maximization can be described as the principle which only undertakes the actions...

Q: How do I calculate the variance of the portfolio as shown in the image?

A: Calculating Variance is simple, but one needs to follow the certain steps to reach the answer. First...

Q: Scenario Probability Stock fund Rate of Return Bond fund Rate of Return Severe recession 0.05 -30 ...

A: Computation of variance and standard deviation of stock fund:

Q: For Hero Honda company, country's largest two-wheeler maker Hero MotoCorp announced a joint venture ...

A: As per the capital budgeting criteria, investment is made in any project if the net present value of...

Q: Suppose you have good credit and can get a 30 year mortgage for $100,000 at 5%. What is your monthl...

A: Amount of Mortgage (pv) = $100,000Time Period = 30 yearsNumber of Payments in a Period = 12Total Num...

Q: How do i solve for r in the equation: A=P(1+rt)

A: Interest rate is the rate which is paid by the borrower as per the amount borrowed from the various ...

Q: The largest type of municple bonds outstanding is: A. revenue bonds. B. Industrial development bonds...

A: Municipal Bonds:Municipal bonds are those bonds which are issued by local or state government of a c...

Q: You would like to have $72,000 available in 15 years. There are two options. Account A has a rate of...

A: Let A and B be the amount to be deposited in Account A and Account B respectively to get the desired...

Q: Suppose that 10 years ago you bought a home for $150,000, paying 10% as a down payment, and financin...

A: Computation of the equity:Hence, the equity is $91,752.

Q: You deposit $3000 in an account that pays 88% interest compounded semiannually. After 33 years, th...

A: Amount deposited, P = $ 3,000Future value of P deposited in an account offering annual interest rate...

Q: Can someone please just give me the right answer to the right decimal places for the last part, "How...

A: Future Value = $860,000Interest Rate = 6.5%Interest Rate during a Period = 6.5% ÷ 4 = 1.625%Type of ...

Q: D. 7.69 percent E 8.26 percent 16. An increase in which of the following would increase the price of...

A: A call option is direct proportional to the stock volatility in the market. if the volatility increa...

Q: Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this c...

A: Calculate the expected return and standard deviation as follows:

Q: Why do most acquisitions fail to create shareholder value?

A: Mergers and acquisitions generally failed to create or add value for the shareholders because of ove...

Q: Gilmore, Inc., had equity of $130,000 at the beginning of the year. At the end of the year, the comp...

A: The maximum growth which a firm can achieve by using undistributed earnings is known as internal gro...

Q: NikkiG’s Corporation’s 10-year bonds are currently yielding a return of 6.80 percent. The expected i...

A: Current Yield = 6.80%Expected Inflation Premium (EIP) = 1.20%Risk-free Rate (RFR) = 2.10%Liquidity R...

Q: With blank voting, all directors up for election are vorted on by the share holders at the same time...

A: With cumulative voting, all directors up for election are voted on by the share holders at the same ...

Q: Question 3. Assume the continuously compounded interest rate has constant value 15%. The table below...

A: Given,Continuously Compounded Interest Rate = 15% Calculation of Future Price (Φ(t,T)), Mark-to-Mark...

Q: Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiann...

A: Following information’s are given in the question:

Q: Expected Return, Variance, Std. Deviation and Cofficient of Variation:Magee Inc.'s manager believes ...

A: The expected return Re is as shown on the white board. Pi = Probability of state i; Ri is the return...

Q: Please show all equations and work as needed. Make the correct answer clear. If possible, please typ...

A: Calculation of WACC of firm after leverage (effective after-tax):Answer:WACC after leverage is 15.95...

Q: 10. Consider the two one-shot investment alternatives shown in the table below. Neither alternative ...

A: a.For one-shot investment alternatives, the length of the planning horizon is based on the longest d...

Q: 13. Company RTZ has a unique dividend policy. The company anticipates paying a dividend of $8 one ye...

A: Non-constant dividend growth model assumes that for first few years dividends are paid at a non-cons...

Q: Wildcat engineering decides to take a $10,000 interest only lona. The loan is to be paid montly over...

A: Interest only loan can be described as the loan on which borrower only pays the interest payments du...

Q: What is Internal Rate of Return - Variable Cash Flows with Reversion? Please provide examples.

A: The internal rate of return is the one of the discounted techniques of capital budgeting which is us...

Q: Consider the following three bond quotes: a Treasury bond quoted at 103:17, a corporate bond quoted ...

A: Bonds are usually quoted as a percentage of its par value. Thus, to find the price of the bond follo...