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Fundamentals Of Corporate Finance, 9th Edition
9th Edition
ISBN: 9781260052220
Author: Richard Brealey; Stewart Myers; Alan Marcus
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 16, Problem 10QP
Leverage and the Cost of Capital. “Increasing financial leverage increases both the cost of debt (rdebt) and the
- a. How much debt does the company now have?
- b. How much equity does it now have?
- c. What is the overall cost of capital?
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“Increasing financial leverage increases both the cost of debt (rdebt) and the cost of equity (requity). So the overall cost of capital cannot stay constant.” This problem is designed to show that the speaker is confused. Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost of debt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to 6% and the cost of equity to rise to 12%. Assume the firm pays no taxes.
a. After the debt issue, what percent of the firm is financed with debt? (Do not round intermediate calculations. Enter your answer as a whole percent.)
b. After the debt issue, what percent of the firm is financed with equity? (Do not round intermediate calculations. Enter your answer as a whole percent.)
c. What is the overall cost of capital? (Enter your answer as a percent rounded to 1 decimal…
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Why is the following statement true? “Other things being the same, firms with relatively stable sales are able to carry relatively high debt ratios.”
MACC Inc. has fixed operating costs of $500,000 and variable costs of $50per unit. If it sells the product for $75 per unit, what is the break-even quantity? show work in excel.
Leverage and the Cost of Capital. “Increasing financial leverage increases both the cost ofdebt (rdebt) and the cost of equity (requity). So the overall cost of capital cannot stay constant.”This problem is designed to show that the speaker is confused. Buggins Inc. is financed equallyby debt and equity, each with a market value of $1 million. The cost of debt is 5%, and the costof equity is 10%. The company now makes a further $250,000 issue of debt and uses theproceeds to repurchase equity. This causes the cost of debt to rise to 6% and the cost of equityto rise to 12%. Assume the firm pays no taxes. (LO16-1)a. How much debt does the company now have?b. How much equity does it now have?c. What is the overall cost of capital?
Chapter 16 Solutions
Fundamentals Of Corporate Finance, 9th Edition
Ch. 16 - Prob. 1QPCh. 16 - Prob. 2QPCh. 16 - Prob. 3QPCh. 16 - Prob. 4QPCh. 16 - Prob. 5QPCh. 16 - Prob. 6QPCh. 16 - Prob. 7QPCh. 16 - Prob. 8QPCh. 16 - Prob. 9QPCh. 16 - Leverage and the Cost of Capital. Increasing...
Ch. 16 - Prob. 11QPCh. 16 - Prob. 12QPCh. 16 - Prob. 13QPCh. 16 - Prob. 14QPCh. 16 - Prob. 15QPCh. 16 - Prob. 16QPCh. 16 - Tax Shields. Establishment Industries borrows 800...Ch. 16 - Prob. 18QPCh. 16 - Prob. 19QPCh. 16 - Prob. 20QPCh. 16 - Prob. 21QPCh. 16 - Prob. 22QPCh. 16 - Prob. 23QPCh. 16 - Prob. 24QPCh. 16 - Prob. 25QPCh. 16 - Prob. 26QPCh. 16 - Prob. 27QPCh. 16 - Prob. 28QPCh. 16 - Prob. 29QPCh. 16 - Prob. 30QPCh. 16 - Prob. 31QPCh. 16 - Prob. 32QPCh. 16 - Prob. 33QPCh. 16 - Prob. 34QPCh. 16 - Prob. 35QPCh. 16 - Prob. 36QPCh. 16 - Prob. 37QP
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