How would each of the following scenarios affect a firm’s cost of debt, rd( 1 − T); itscost of equity, rs; and its WACC? Indicate with a plus (+), a minus (−), or a zero (0)whether the factor would raise, lower, or have an indeterminate effect on the item inquestion. Assume for each answer that other things are held constant, even though insome instances this would probably not be true. Bo prepared to justify your answerbut recognize that several of the parts have no single correct answer. These questionsare designed to stimulate thought and discussion. Effect onTa(1-T)WACCa. The corporate tax rate is lowered.b. The Federal Reserve tightens credit.The firm uses more debt; that is, it increases itsdebt ratio.C.d. The dividend payout ratio is increased.The firm doubles the amount of capital it raisesduring the year.f. The firm expands into a risky new area.& The firm merges with another firm whose earningsare countercyclical both to those of the first firmand to the stock market.e.h. The stock market falls drastically, and the firm'sstock price falls along with the rest.i Investors become more risk-averse.i The firm is an electric utility with a largeinvestment in nuclear plants. Several states areconsidering a ban on nuclear power generation.||||

The weighted average cost of capital is the cost of a corporation that the corporation incurs upon…

Answered: Effect on Ta(1-T) WACC a. The corporate…

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter4: Analysis Of Financial Statements

Section: Chapter Questions

Problem 15P: RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of 200,000, a net income of 15,000, and the...

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How would each of the following scenarios affect a firm’s cost of debt, rd
( 1 − T); its
cost of equity, rs
; and its WACC? Indicate with a plus (+), a minus (−), or a zero (0)
whether the factor would raise, lower, or have an indeterminate effect on the item in
question. Assume for each answer that other things are held constant, even though in
some instances this would probably not be true. Bo prepared to justify your answer
but recognize that several of the parts have no single correct answer. These questions
are designed to stimulate thought and discussion.

Effect on
Ta(1-T)
WACC
a. The corporate tax rate is lowered.
b. The Federal Reserve tightens credit.
The firm uses more debt; that is, it increases its
debt ratio.
C.
d. The dividend payout ratio is increased.
The firm doubles the amount of capital it raises
during the year.
f. The firm expands into a risky new area.
& The firm merges with another firm whose earnings
are countercyclical both to those of the first firm
and to the stock market.
e.
h. The stock market falls drastically, and the firm's
stock price falls along with the rest.
i Investors become more risk-averse.
i The firm is an electric utility with a large
investment in nuclear plants. Several states are
considering a ban on nuclear power generation.
||
||

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