PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Textbook Question
Chapter 1, Problem 6PS
We at F&H have of course noted the complaints of a few spineless investors and uninformed security analysts about the slow growth of profits and dividends. Unlike those confirmed doubters, we have confidence in the long-run demand for mechanical encabulators, despite competing digital products. We are therefore determined to invest to maintain our share of the overall encabulalor market. F&H has a rigorous CAPFX approval process, and we are confident of returns around 8% on investment. That’s a far better return than F&H earns on its cash holdings. The CFO went on to explain that F&H invested excess cash in short-term U.S. government securities, which are almost entirely risk-free but offered only a 4%
- a. Is a
forecasted 8% return in the encabulator business necessarily better than a 4% safe return on short-term U.S. government securities? Why or why not? - b. Is F&H’s opportunity cost of capital 4%? How in principle should the CFO determine the cost of capital?
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Finance
Companies A and B are each considering an unanticipated new investment opportunity that will marginally increase the value of the company and will also increase the company’s level of diversication. Company A is unlevered, and company B has a capital structure of 50% debt. Assume that the shareholders control the company, which one of the following statements is correct.
a) Since NPV of the investment is positive both company A and B will accept the project.
b) Since the project only marginally increase company values but decreases return variance of the company’s assets both companies will reject the project.
c) It is more obvious that Company B invests since for levered company the diversication benefits are more important.
d) None of the given alternative.
TRUE OR FALSE
Answer as either true or false and provide a reason for why.
When a company pays dividends, its share price falls.
Modigliani and Miller proposition II (without taxes) implies that the weighed average cost of capital increases as more debt is issued, since debt make the firm more risky
The empirical findings that more profitable firms have lower debt ratios is consistent with the trade-off theory regarding capital structure.
The WACC formula assumes that the amount of debt issued remains constant.
Other things being equal, buying a put option is the same as selling a call option
1) When investors disregard their own information which is incomplete and follow the momentum activities of other market participants, they could inadvertently cause a financial bubble by transmitting inaccurate information with each additional trade. This phenomenon is called ______________.
Multiple Choice
Asymmetric information.
Attribution bias.
Systematic bias.
Overconfidence.
Information cascade.
2) Canada Revenue Agency requires firms to claim only one-half of the incremental capital cost of a new project in its first year for tax purposes. This rule is called the _________.
Multiple Choice
CCA rule.
Half-CCA rule.
Two-year rule.
Half-year rule.
Incomplete CCA rule.
3)Alternative ways of calculating operating cash flows are the bottom-up approach, the top-down approach, and the tax shield approach.
True/False?
Chapter 1 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 1.A - Prob. 1QCh. 1 - Investment and financing decisions Read the...Ch. 1 - Investment and financing decisions Which of the...Ch. 1 - Prob. 3PSCh. 1 - Prob. 4PSCh. 1 - Prob. 5PSCh. 1 - Opportunity cost of capital FH Corp. continues to...Ch. 1 - Corporate goals We can imagine the financial...Ch. 1 - Maximizing shareholder value Ms. Espinoza is...Ch. 1 - Prob. 9PS
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