The idea that leverage (debt financing) can increase profitability is most clearly represented by the [Select] [Select] DuPont Identity Principal of Increasing Risk Diminishing Marginal Returns Coefficient of Variation Income Statement Time Value of Money < Previous
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- MM Proposition II states that: I) the expected return on equity is positively related to leverage; II) the required return on equity is a linear function of the firm's debt to equity ratio; III) the risk to equity increases with leverage Multiple Choice: A) I, II, and III B) I only C) II only D) III only_______ DOES NOT affect a firm's business risk. Question 9 options: A ) Revenue variability B) Input price variability C) Demand variability D) The extent to which interest rates on the firm's debt fluctuate E) The extent to which operating costs are fixed22. A qualitative factor (as opposed to a quantitative factor) that managment should consider when evaluating alternative capital investments would be Group of answer choices estimated costs The corporate strategy projected net cash flows economic returns and IRR
- USING PAST INFORMATION TO ESTIMATE REQUIRED RETURNS Use online resources to work on this chapters questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions. Chapter 8 discussed the basic trade-off between risk and return. In the capital asset pricing model (CAPM) discussion, beta was identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would like to know how the stock will move with the market in the future, but because we dont have a crystal ball, we generally use historical data to estimate this relationship with beta. As mentioned in Web Appendix 8A, beta can be estimated by regressing the individual stocks returns against the returns of the overall market. As an alternative to running our own regressions, we can rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various Internet websites. On the summary screen, you should see an interactive chart. Typically, you can chart performance over the last 24 hours, 1 month, 6 monthsup to 5 years, or even longer. Select different time periods and watch how the graph changes. On this screen you should also see a menu to select historical prices (historical data). Some websites will not only show daily activity but also weekly or monthly activity In addition, some websites will allow you to download the data into an Excel spreadsheet.CONCEPTUAL: RETURN ON EQUITY Which of the following statements is most correct? (Hint: Work Problem 4-16 before answering 4-17, and consider the solution setup for 4-16 as you think about 4-17.) a. If a firms expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and financing them with debt will raise the firms expected return on common equity (ROE). b. The higher a firms tax rate, the lower its BEP ratio, other things held constant. c. The higher the interest rate on a firms debt, the lower its BEP ratio, other things held constant. d. The higher a firms debt ratio, the lower its BEP ratio, other things held constant. e. Statement a is false, but statements b, c, and d are true.(1) Why do analysts need to consider different factorswhen evaluating a company’s ability to repay shortterm versus long-term debt? (2) Would the currentamount of the owners’ equity be a reasonable price topay for a company? Why or why not?
- Question #5. When calculating the weighted average cost of capital (WACC), should we use marketvalues or balance sheet values as the weights of debt and equity? Explain your response25- The minimum rate of return a firm must earn on its assets to maintain the currentvalue of its securities is represented by which of the following? a. Cost of equityb. Pretax cost of debt c. After-tax cost of debtd. Weighted average cost of capitale. Weighted average cost of preferred and common stockMatch each definition that follows with the term (a–h) it defines. Question 7 options: a company's ability to make interest payments and repay debt at maturity focuses on a company’s ability to generate net income useful for comparing one company to another or to industry averages use debt to increase the return on an investment measures the risk that interest payments will not be made if earnings decrease the percentage analysis of the relationship of each component in a financial statement to a total within the statement a percentage analysis of increases and decreases in related items on comparative financial statements an analysis of a company’s ability to pay its current liabilities 1. solvency 2. leverage 3. times interest earned 4. horizontal analysis 5. vertical analysis 6. common-sized financial statements 7. current position analysis 8.…
- B5) According to these techniques (Payback period traditional, Discount payback period modern ,net present value and profitability index ) which technique is better and why?15-2 Which of the following real-world factors favour a high dividend payout? taxes flotation costs debt covenant desire for current income uncertainty resolution Select one: a. I and II only b. II and III only c. I, II, and III only d. III, IV, and V only e. I, IV, and V onlySelect all that are true with respect to the adjusted present value (APV) DCF methodology. Group of answer choices It is sometimes called the “divide and conquer” method because it breaks the valuation into multiple components. For example, the firm as if it were all equity financed and the value of the costs and benefits of financing. The PV of interest tax shields are determined by discounting all interest payments at the firm's cost of equity. The after-tax WACC is the appropriate discount rate for estimating value as if the firm were unlevered. The unlevered WACC is the appropriate discount rate for estimate value as if the firm were unlevered.