Fundamentals of Corporate Finance
11th Edition
ISBN: 9781259870576
Author: Ross
Publisher: MCG
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Textbook Question
Chapter 16, Problem 19QP
Weighted Average Cost of Capital [LO1] In a world of corporate taxes only, show that the WACC can be written as WACC = RU × [1 − TC(D/V)].
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In a world with taxes, the value of a leveraged firm equals the value of an unleveraged firm plus:
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Chapter 16 Solutions
Fundamentals of Corporate Finance
Ch. 16.1 - Why should financial managers choose the capital...Ch. 16.1 - What is the relationship between the WACC and the...Ch. 16.1 - What is an optimal capital structure?Ch. 16.2 - Prob. 16.2ACQCh. 16.2 - Prob. 16.2BCQCh. 16.2 - Prob. 16.2CCQCh. 16.3 - What does MM Proposition I state?Ch. 16.3 - What are the three determinants of a firms cost of...Ch. 16.3 - Prob. 16.3CCQCh. 16.4 - What is the relationship between the value of an...
Ch. 16.4 - If we consider only the effect of taxes, what is...Ch. 16.5 - Prob. 16.5ACQCh. 16.5 - What are indirect bankruptcy costs?Ch. 16.6 - Can you describe the trade-off that defines the...Ch. 16.6 - What are the important factors in making capital...Ch. 16.7 - Prob. 16.7ACQCh. 16.7 - What is the difference between a marketed claim...Ch. 16.7 - What does the extended pie model say about the...Ch. 16.8 - Prob. 16.8ACQCh. 16.8 - Why might firms prefer not to issue new equity?Ch. 16.8 - Prob. 16.8CCQCh. 16.9 - Do U.S. corporations rely heavily on debt...Ch. 16.9 - What regularities do we observe in capital...Ch. 16.10 - Prob. 16.10ACQCh. 16.10 - Prob. 16.10BCQCh. 16 - Maximizing what will maximize shareholder value?Ch. 16 - What is most closely related to a firms use of...Ch. 16 - Give an example of a direct cost of bankruptcy.Ch. 16 - Prob. 16.7CTFCh. 16 - Prob. 1CRCTCh. 16 - Prob. 2CRCTCh. 16 - Optimal Capital Structure [LO1] Is there an easily...Ch. 16 - Observed Capital Structures [LO1] Refer to the...Ch. 16 - Financial Leverage [LO1] Why is the use of debt...Ch. 16 - Homemade Leverage [LO1] What is homemade leverage?Ch. 16 - Prob. 7CRCTCh. 16 - Prob. 8CRCTCh. 16 - Prob. 9CRCTCh. 16 - Prob. 10CRCTCh. 16 - Prob. 1QPCh. 16 - Prob. 2QPCh. 16 - Prob. 3QPCh. 16 - Prob. 4QPCh. 16 - MM and Stock Value [LO1] In Problem 4, use MM...Ch. 16 - Prob. 6QPCh. 16 - Prob. 7QPCh. 16 - Prob. 8QPCh. 16 - Homemade Leverage and WACC [LO1] ABC Co. and XYZ...Ch. 16 - Prob. 10QPCh. 16 - MM and Taxes [LO2] In the previous question,...Ch. 16 - Calculating WACC [LO1] Twice Shy Industries has a...Ch. 16 - Calculating WACC [LO1] Braxton Corp. has no debt...Ch. 16 - MM and Taxes [LO2] Meyer Co. expects its EBIT to...Ch. 16 - Prob. 15QPCh. 16 - MM [LO2] Tool Manufacturing has an expected EBIT...Ch. 16 - Prob. 17QPCh. 16 - Homemade Leverage [LO1] The Day Company and the...Ch. 16 - Weighted Average Cost of Capital [LO1] In a world...Ch. 16 - Cost of Equity and Leverage [LO1] Assuming a world...Ch. 16 - Business and Financial Risk [LO1] Assume a firms...Ch. 16 - Stockholder Risk [LO1] Suppose a firms business...Ch. 16 - Prob. 1MCh. 16 - Prob. 2MCh. 16 - Prob. 3MCh. 16 - Stephenson Real Estate Recapitalization Stephenson...Ch. 16 - Stephenson Real Estate Recapitalization Stephenson...
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- Archimedes Levers is financed by a mixture of debt and equity. You have the followinginformation about its cost of capital:rE =__, rD = 12%, rA = __,Beta(E) = 1.5, Beta(D) =__, Beta(A) = __,rf = 10%, rm = 18%, D/V = .5Can you fill in the blanks? Suppose now that Archimedes repurchases debt and issuesequity so that D / V = .3. The reduced borrowing causes r D to fall to 11%. How do theother variables change?arrow_forward1. Determine the weighted average cost of capital (WACC) for Vigour Pharmaceuticals. Kindly use the following Formulae: WACC: (E/ V) x R e + ( D/ V) x R d x (1-Tc) whereas: E is for Equity ( market value of firm's equity) D is for Debt ( market value of firm's dept) V is for Value ( combine market value which is D + E) R e is the cost of equity R d is the cost of debt Tc is the corporate tax ratearrow_forwardM&M Proposition I, without taxes, is referred to as the pie model. Explain why the size of the pie remains constant as the debt-equity ratio of a firm increases.arrow_forward
- 6. What is the Cost of Equity for CS3? 7. The weighted average cost of capital for CS1 is 8. The weighted average cost of capital for CS3 is 9. What is the weight of equity in the optimal capital structure 10. What is the weighted average cost of capital on the optimal capital structure?arrow_forwardThe relationship between Firm Z's growth potential and its external financing needed is: EFN = –2,275 + 147,725g What is the growth rate when EFN is zero? Multiple Choice 20% 5.25% 0% 1.54% 64.93%arrow_forward9) In DCF valuation, a company can increase its return on equity (ROE) by increasing its leverage ratio (D/E) if and only if its return on capital (ROC) exceeds the after-tax cost of debt (r_d x (1-Tc)). (Assume all other inputs are fixed.) True or false?arrow_forward
- 9.Which of the following are true according to the Modigliani and Miller propositions? i.In a world without taxes, all else equal, the value of a firm with a low debt-to-equity ratio is higher than the value of a firm with a high debt-to-equity ratio.ii.In a world without taxes, a firm's cost of equity capital increases as the firm takes on more debt.iii.In a world with taxes, firm value is maximized when the firm has a low debt-to-equity ratio. iv.In a world with taxes, a firm's cost of equity capital increases as the firm takes on more debt.a.ii, iii, and iv, but not ib.i, iii, and iv, but not iic.ii and iv, but not i or iiid.i, ii, and iii, but not ivarrow_forwardQ. Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of equity. Company estimates that its WACC is 12%. The capital structure is 75% debt and 25% internal equity. Before tax cost of debt is 12.5 % and tax rate is 20%. Risk free rate is rRF = 6% and market risk premium (rm - rRF ) = 8%: What is the beta of the company?arrow_forwardYou are thinking about investing in either X corp, or Y corp. Based on the following market measures, which company could be the best option based on possible return of investment? x y Price/Earnings Ratio 10.39 12.27 Earnings per Common Share 3.5 5.4 Divident Payout .464 .320arrow_forward
- We live in a perfect Modigliani Miller World without frictions. Vencidario Inc. has a mixed capital structure, with both equity and debt. We know the following about its cost of capital:.(i) risk-free rate rf = 10%; (ii) beta of equity bE = 1.5; (iii) cost of debt rD = 12%; (iv) market return rm = 18%; (v) debt-to-value ratio D/V = 0.5. Explain in detail the mechanism behind the reduction of the cost of debt from question 1a) to question 1b). Compare how the cost of equity would have changed from subitem a) to subitem b) if there were no reduction on the cost of debt.arrow_forwardHow would an increase in each of the following factors affect the AFN?1. Payout ratio2. Capital intensity ratio, A0*/S03. Profit margin4. Days sales outstanding, DSO5. Sales growth rateIs it possible for the AFN to be negative? If so, what would this indicate?If excess capacity exists, how would that affect the calculated AFN?arrow_forwardThe unlevered beta is 1.0. The both the risk-free rate and market risk premium is 5%. The applicable corporate tax rate for the company is 30%. What is the Weighted Average Cost of Capital on the optimal capital structure? (No rounding off until the final answer)arrow_forward
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Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY