Probable Effect on ka(1 – T) ke WACC a. The dividend payout ratio is increased. b. The firm doubles the amount of capital it raises during the year. c. The firm expands into a risky new area. d. The firm merges with another firm whose earnings are countercyclical both to those of the first firm and to the stock market. e. The stock market falls drastically, and the firm's stock price falls along with the rest. f. Investors become more risk-averse. g. The firm is an electric utility with a large investment in nuclear plants. Several states are considering a ban on nuclear power generation.

Cornerstones of Financial Accounting
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ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter10: Stockholder's Equity
Section: Chapter Questions
Problem 54BE: Stockholder Payout Rations Super Duper Corporation had a string of successful years. Super Dupers...
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How would each of the following scenarios affect a firm’s cost of debt, kd(1 – T); its cost of equity ke and its WACC?  Indicate with a plus sign (+), a minus (-) or a zero if the factor would raise, would lower or would have 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.  Be prepared to justify your answer but recognize that several of the parts have no single correct answer.

Probable Effect on
ka(1 – T) k.
WACC
a. The dividend payout ratio is increased.
b. The firm doubles the amount of capital it raises
during the year.
c. The firm expands into a risky new area.
d. The firm merges with another firm whose earnings
are countercyclical both to those of the first firm and
to the stock market.
e. The stock market falls drastically, and the firm's stock
price falls along with the rest.
f. Investors become more risk-averse.
g. The firm is an electric utility with a large investment in
nuclear plants. Several states are considering a ban
on nuclear power generation.
Transcribed Image Text:Probable Effect on ka(1 – T) k. WACC a. The dividend payout ratio is increased. b. The firm doubles the amount of capital it raises during the year. c. The firm expands into a risky new area. d. The firm merges with another firm whose earnings are countercyclical both to those of the first firm and to the stock market. e. The stock market falls drastically, and the firm's stock price falls along with the rest. f. Investors become more risk-averse. g. 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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