Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 14.5, Problem 1CC
Consider the questions facing Dan Harris, CFO of EBS, at the beginning of this chapter. What answers would you give based on the Modigliani-Miller Propositions? What considerations should the capital structure decision be based on?
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Indicate whether each of the following statements is true or false. Support your answerswith the relevant explanations.
a) Under the conditions of perfect capital markets, the cost of capital of a companyfinanced fully by equity is expected to be equal to that of the same company butfinanced with 50% equity and 50% debt. (Explain your reasoning.)
Please answer in your own words
Which of the following statements best describes how a corporation determines its cost of capital?
Group of answer choices
The cost is derived from determining the cost of each component in a firm's capital structure.
The cost is a function of the issuance of interest-bearing instruments.
The cost is derived only from permanent investments by shareholders.
The cost is a function of temporary (short-term) sources of financing.
Is it ever appropriate or acceptable to use the payback method of evaluating capital investment decisions?
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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- What is the benefit(s) of the accountants involvement in the capital investment decision?arrow_forwardWhat are the steps involved in the process for capital decision-making?arrow_forwardModigliani-Miller theorem provides a basis for modern thinking on capital structure. Explain the two fundamental assumptions used to support the M&M capital structure theorem.arrow_forward
- Whatinformation is developed in the Capital MarketLine analysis and then carried over and used tohelp specify the SML?arrow_forwardExplain Why you agree or disagree with the following statements. The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations A firm should select the capital structure that is fully unlevered.arrow_forwardExplain the difficulties for determining the cost of capital in the short term decision making.arrow_forward
- Explain Why you agree or disagree with the following statement: The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations. b) A firm should select the capital structure that is fully levered.arrow_forwardWhat weights should be used when you calculatethe WACC? Discuss the choice between book value and market value weights, and the role of the“target” capital structure for a firm whose actualcapital structure is far removed from the target.arrow_forwardIn the equities capital markets, participants play key roles to support primary and secondary capital markets. Participants include investors, speculators, market makers, underwriters, and brokers. how would participants interact to facilitate capital market activities? For example, when there is a Federal Reserve action that affects interest rates, how might the various participants interact with a company going through an acquisition?arrow_forward
- As part of his duties, if a finance manager of a company is working on the appropriate source of finance and estimating cost of capital with appropriate debt-equity combination of the company for an expansion proposal, which of the following function he is working on? Select one: A. Forecasting Financial Requirement B. Cash Management C. Acquiring Necessary Capital D. Investment Decisionarrow_forwardPlease fill out the table attached and give your opinion on which alternative is preferable (The company’s management wants to finance the expansion in a way that will serve the best interests of present stockholders).arrow_forward
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