Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 17, Problem 16PS
MM proposition 2 Imagine a firm that is expected to produce a level stream of operating profits. As leverage is increased, what happens to
- a. The ratio of the market value of the equity to income after interest?
- b. The ratio of the market value of the firm to income before interest if (i) MM are right and (ii) the traditionalists are right?
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QUESTION 6
Which of the following statements is true?
O A. Companies look for investments with payback periods that are larger than their maximum accepted payback period
O B. An investment with a profatibility index less than 1 is profitable and desirable
O C.A projected is accepted if the IRR is less than the cost of capital
O D. None of the above are true
Does decreasing net margin percentages and slightly increasing financial leverage have an effect on Return on Equity (ROE)?. If Yes, What should a company do to solve such problem.
Answer quickly please
The _________ is the internal rate of return a firm must earn on its investment in order to maintain the market value of its stock.
a.
IRR
b.
net profit margin
c.
Cost of Capital
d.
gross profit margin
Chapter 17 Solutions
Principles of Corporate Finance
Ch. 17 - Homemade leverage Ms. Kraft owns 50,000 shares of...Ch. 17 - Homemade leverage Companies A and B differ only in...Ch. 17 - Corporate leverage Suppose that Macbeth Spot...Ch. 17 - Corporate leverage Reliable Gearing currently is...Ch. 17 - MMs propositions True or false? a. MMs...Ch. 17 - MMs propositions What is wrong with the following...Ch. 17 - Prob. 7PSCh. 17 - MM proposition 1 Executive Cheese has issued debt...Ch. 17 - Prob. 9PSCh. 17 - Prob. 10PS
Ch. 17 - MM proposition 2 Spam Corp. is financed entirely...Ch. 17 - MM proposition 2. Increasing financial leverage...Ch. 17 - Prob. 13PSCh. 17 - MM proposition 2 Look back to Section 17-1....Ch. 17 - MM proposition 2 Hubbards Pet Foods is financed...Ch. 17 - MM proposition 2 Imagine a firm that is expected...Ch. 17 - MM proposition 2 Archimedes Levers is financed by...Ch. 17 - MM proposition 2 Look back to Problem 17. Suppose...Ch. 17 - Prob. 19PSCh. 17 - After-tax WACC Gaucho Services starts life with...Ch. 17 - After-tax WACC Omega Corporation has 10 million...Ch. 17 - After-tax WACC Gamma Airlines has an asset beta of...Ch. 17 - Prob. 23PSCh. 17 - Investor choice People often convey the idea...Ch. 17 - Investor choice Suppose that new security designs...
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- Define the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant? Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate, the amount of accounts payable, the profit margin, and the payout ratio.arrow_forwardWhich of the following formulas is INCORRECT? g = retention rate × return on new investment. When return on equity is equal to the cost of equity, shareholders will prefer the firms' management to increase the payout ratio. When return on new investment is more than the cost of equity, the share price is expected to increase. g = (1 – payout rate) x return on new investment.arrow_forward1. The more optimistic investors are about a company’s future profits, the ________ the ratio of the company’s market value to book value.greaterlowerno effect onarrow_forward
- Which of the following statements is FALSE? Question content area bottom Part 1 A. Growth rate of the firm is higher, it is more optimal to have a higher level of debt relative to equity in the firm capital structure. B. Growth will affect the optimal leverage ratio even if the firm has positive earnings. C. When examining tax, the optimal debt level is proportional to its current earnings. D. The more unsure we are of EBIT the more chance that interest will exceed EBIT, if the interest expense is higharrow_forwardAn increase in a firm's leverage ratio O A. tends to decrease the expected profit per unit of capital but increases the amount of risk associated with the firm. O B. tends to decrease the expected profit per unit of capital and decrease the amount of risk associated with the firm. O C. tends to increase the expected profit per unit of capital but decreases the amount of risk associated with the firm. O D. tends to increase the expected profit per unit of capital and increase the amount of risk associated with the firm.arrow_forwardMM Proposition II states that: I) the expected return on equity is positively related to leverage; II) the required return on equity is a linear function of the firm's debt to equity ratio; III) the risk to equity increases with leverage Multiple Choice: A) I, II, and III B) I only C) II only D) III onlyarrow_forward
- 3. How large is the gap between Beta(Asset) and Beta(Leverage)? What is the impact of their difference on the returns as expected by shareholders?arrow_forwardwhich one is correct please confirm? QUESTION 25 The constant growth valuation model approach to calculating the cost of equity assumes that ____. a. earnings, dividends, and stock price will grow at a constant rate b. the growth rate is greater than or equal to ke c. earnings and dividends grow at a constant rate, but stock price growth is indeterminate d. dividends are constantarrow_forwardIf the firms earns rate of return on its investments equal to the required rate of return it is called O a. Normal firm O b. Growth firm O c. Decline firm Od. Slow firmarrow_forward
- which one is correct please confirm? QUESTION 39 The constant growth valuation model approach to calculating the cost of equity assumes that ____. a. dividends are constant b. earnings and dividends grow at a constant rate, but stock price growth is indeterminate c. earnings, dividends, and stock price will grow at a constant rate d. the growth rate is greater than or equal to kearrow_forwardPlease answer this question 1. Sustainable growth rate, what must a firm do to grow faster a. Issue new debt b. Increase payout ration c. increase shareholders d. Raise new preferred.arrow_forwardWhich of the following statements is not correct? The higher the sales growth rate g is, the larger AFN will be—other things held constant. The higher the capital intensity ratio, the larger AFN will be—other things held constant. The higher the firm’s spontaneous liabilities, the smaller AFN will be—other things held constant. The higher the payout ratio, the smaller AFN will be if other things held constant.arrow_forward
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