Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 11, Problem 3Q
Summary Introduction

To discuss:  The way the given factors has an effect on the cost of debt of the firm, cost of equity, and the WACC.

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Which of the following steps is not required when estimating a firm’s weighted average cost of capital?a. Evaluate the firm’s capital structure and determine the relative weight of each component in the mix.b. Estimate the opportunity cost of each of the sources of financing and adjust it for the effects of taxes where appropriate.c. Subtract the weighting of preferred stock and reallocate the weighting to equity and debt.d. Calculate the weighted average cost of capital by computing a weighted average of the estimated after-tax costs of the various capital sources used by the firm.e. These are all steps taken to calculate the weighted average cost of capital.
According to MM propositions, which of the following statements best describes the consequence of increasing debt-to-value ratio for a firm? Group of answer choices The weighted average cost of capital can decrease. The weighted average cost of capital can increase. The cost of equity capital can decrease. The weighted average cost of capital must not stay constant.
How would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) 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.      rd (1-t) rs  WACC 4) The dividend payout ratio is increased.         5) The firm expands into a risky new area.         6) Investors become more risk-averse.         7) The firm is an electric utility with a large investment innuclear plants.  Several states are considering a ban on nuclear power generation.
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