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- Suppose interest rates in the economy increase. How would such a change affect the costs of both debt and common equity based on the CAPM?Explain how a change in interest rates in the economy would beexpected to affect each component of the weighted average costof capital.c. Define the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant? Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate, the amount of accounts payable, the profit margin, and the payout ratio.
- Define the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant? Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate, the amount of accounts payable, the profit margin, and the payout ratio.Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?If we assume that inflation, the real cost of capital and the nominal cost of capital are always positive, which of the following statements is true? Question 3Select one: a. The expected inflation rate will always be greater than the nominal cost of capital. b. The nominal cost of capital will always be greater than the real cost of capital. c. The real cost of capital will always be greater than the nominal cost of capital. d. The expected inflation rate will always be greater than the real cost of capital.
- Is it correct to state that banks’ returns will be higher if interest rates increase? Outline the advantages and drawbacks of Gap analysis and Duration analysis.Which of the following statements is true? Question 3Select one: a. The inflation rate is a measure of how much providers of capital expect the purchasing power of their investment to grow. b. The real cost of capital is a measure of how much providers of capital expect the purchasing power of their investment to grow. c. The real cost of capital is a measure of how much providers of capital expect their wealth, as measured by the number of dollars they have, to grow. d. The nominal cost of capital is a measure of how much providers of capital expect the purchasing power of their investment to grow.What are the two ways sinking funds can be handled? Which alternative will be usedif interest rates have risen? If interest rates have fallen?
- This theory assumes that the driver of interest rates are the savings and investment flows. A• Interest rate theory B• Market theory C• Biased expectation theory D• Market Segmentation theoryWhy interest rate tends to increases before the crisis and then decline during the crisis? (refer to image)27. What are the advantages of the arbitrage pricing theory over the capital asset pricing model?