Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 14.4, Problem 2CC
True or False: When a firm issues equity, it increases the supply of its shares in the market, which should cause its share price to fall.
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a. What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced?
b. Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes.
c. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?
Why is the cost of retained earnings cheaper than the cost of issuing new common stock?
Group of answer choices
Issuing new common stock may send a negative signal to the capital markets, which may depress the stock price.
When a company issues new common stock they also have to pay flotation costs to the underwriter.
Either
Neither
What is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced?
Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes.
How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?
Chapter 14 Solutions
Corporate Finance
Ch. 14.1 - How does the risk and cost of capital of levered...Ch. 14.2 - Why are investors indifferent to the firms capital...Ch. 14.2 - What is a market value balance sheet?Ch. 14.2 - In a perfect capital market, how will a firms...Ch. 14.3 - How do we compute the weighted average cost of...Ch. 14.3 - With perfect capital markets, as a firm increases...Ch. 14.4 - If a change in leverage raises a firm's earnings...Ch. 14.4 - True or False: When a firm issues equity, it...Ch. 14.5 - Consider the questions facing Dan Harris, CFO of...Ch. 14.5 - Prob. 2CC
Ch. 14 - Consider a project with free cash flows in one...Ch. 14 - You are an entrepreneur starting a biotechnology...Ch. 14 - Acort Industries owns assets that will have an 80%...Ch. 14 - Wolfrum Technology (WT) has no debt. Its assets...Ch. 14 - Suppose there are no taxes. Firm ABC has no debt,...Ch. 14 - Suppose Alpha Industries and Omega Technology have...Ch. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Zetatron is an all-equity firm with 100 million...Ch. 14 - Explain what is wrong with the following argument:...Ch. 14 - Prob. 11PCh. 14 - Hardmon Enterprises is currently an all-equity...Ch. 14 - Prob. 13PCh. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Hartford Mining has 50 million shares that are...Ch. 14 - Mercer Corp. has 10 million shares outstanding and...Ch. 14 - Prob. 18PCh. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Prob. 21PCh. 14 - Prob. 22PCh. 14 - Prob. 23P
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Explain why the following statement is wrong: “The stock price is equal to the value of equity, divided by shares outstanding. Therefore, companies should avoid issuing equity because the number of shares outstanding goes up and thus the stock price would decrease."arrow_forwardWhich of the following statements is NOT true? A. Stock owners benefit from stock price increases B. Higher stock prices allow companies access to more capital C. Common stocks are not securities D. Stock prices tend to be very volatilearrow_forwardWhich one of the following action will not lead to reducing financial risk? Issuing bonus shares Issuing equity shares Issuing preferred stock Reducing dividendarrow_forward
- The issue as to whether dividend policy has an effect on share prices raises a question as to whether dividends paid out to stockholders are any more “certain” than the expected future dividends the stockholders hope to receive from retention of firm earnings. This is known as the bird-in-the-hand theory of dividend policy. Do you agree with this theory? Explain.arrow_forwardWhich of the following is correct a. In a leveraged recapitalization, a firm uses its excess cash to buyback shares b. In an LBO, a firm borrows and repurchases its shares thereby reducng the number of shares outstanding. c. In a leveraged recapitalization, a change of ownership occurs as the firm is sold d. In an LBO, debt is a major component of the financing and a change of control occurs. e. In an LBO, managers use excess cash to repurchase sharesarrow_forwardFinancial risk refers to the: Multiple Choice possibility that interest rates will increase. risk of owning equity securities. the risk that the share price may not reflect all known information general business risk of the firm. risk faced by equity holders of firms with debt.arrow_forward
- Preferred stock may be good for a company because it a. is not as costly as common stock or bonds. b. expands the capital base of the firm without diluting the common stock ownership. c. has no future negative ramifications when dividend payments are missed. d. does not require interest payment in times of financial trouble, but are tax-deductible when dividends are paid.arrow_forwardA firm is planning to issue bonds to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. Will the higher earnings per share always translate into a higher stock price? a. No b. Depends on stock price c. Yes d. Indifferentarrow_forwardIs it repurchase shares good for growth company, that does not pay dividends, and have undervalued stock, and have a future investment opportunities? or should maintain its liquidity to fund its investment rather than repurchase shares?arrow_forward
- Which of the following statements is correct? A. The optimal dividend policy is the one that satisfies management, not shareholders. B. The use of debt financing has no effect on earnings per share (EPS) or stock price. C. Stock price is dependent on the projected EPS and the use of debt, but not on the timing of the earnings stream. D. The riskiness of projected EPS can impact the firm's value. E. Dlvidend policy is one aspect of the firm's financial policy that is determined solely by the shareholders. Reset Selectionarrow_forwardWhich is true in relation to stock market efficiency? A.Market Price and Intrinsic value are inputs in determining whether a share is overvalued or undervalued B. If markets are truly efficient, each share prices should have a high deviation from its intrinsic value C. Intrinsic Value is readily observed from the stock market daily reports D. Large companies which is followed by many analyst are generally considered as highly inefficientarrow_forwardIf a company’s market price rises above the IPO price, does that suggest that the company left money on the table and thus received less for the shares than it should have received? If most companies do leave money on the table, does that indicate the IPO market is inefficient? explainarrow_forward
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