Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 17, Problem 9PS
Summary Introduction
To discuss: The validity of the objection that “MM entirely ignores the fact that if borrow more, the payment of a rate of interest will be high”.
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Students have asked these similar questions
1. Modes of extinguishing obligations when creditor abandons his right to collect. (PLEASE EXPLAIN YOUR ANSWER)
A. Condonation
B. Forfeiture
C. Debt
D. Damages
2. Fall after the increase reaches a certain variable amount, this is called: (PLEASE EXPLAIN YOUR ANSWER)
A. Process factor
B. Law of return
C. Inflation
D. Supply & demand
3. It is always true that the effective rate is greater than the nominal rate when m ≥ 2. (PLEASE EXPLAIN YOUR ANSWER)
A. True
B. False
4. (A/F, i%, N) = (A/P, i%, N) + i (PLEASE EXPLAIN YOUR ANSWER)
A. True
B. False
LO3
Discuss the discounted payback rule and some of its shortcomings.
LO4
Explain accounting rates of return and some of the problems with them.
20 Which of the following is the positive impact of inflation?
Inflation makes debtors pay less in real return.
Fixed-income people have the same income but a high cost of living.
A lender will not have the option to earn interest.
Inflation causes the real value of saving for a saving person to eroded.
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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Similar questions
- Consider two loans that are otherwise identical, except that Loan A has a higher chance of borrower default and Loan B has a lower chance of borrower default. Which loan would you expect to charge more interest-all else equal-and why? O Loan A would charge more interest because it is less risky than Loan B. O Loan A would charge more interest because it is riskier than Loan B. O Loan B would charge more interest because it is less risky than Loan A. O Loan B would charge more interest because it is riskier than Loan A.arrow_forwardThe purpose of the inflation premium is to maintain the purchasing power of money while it is loaned to someone else. TTrueFFalse What kind of problem bad credit risks people pose to financial intermediaries ? AMoral hazard BNone of the above CAdverse Selection DFree-ridingarrow_forwardEXERCISE 1Indicate whether each of the following statements is true or false. Support your answerswith the relevant explanations. A. Modigliani and Miller’s Proposition II assumes that increased borrowing doesnot affect the interest rate on the firm’s debt. (Explain your reasoning.)arrow_forward
- Obtaining a revolving credit line is _____ risky than line of credit where the use of funds is _______. Question 10 options: 1) more, not guaranteed 2) more, guaranteed 3) less, not guaranteed 4) less, guaranteedarrow_forward9. How does a lender reduce interest rate risk?arrow_forward9. Reinvest risk is lowest during a period of low interest rates. Also called clean loans. Is this true or false? Why?arrow_forward
- Question 6 of 18 Which of the following is not a characteristic of receivables? Select the correct response: OThe holder has a demonstrated positive intention and ability to hold them to maturity. O The holder can recover substantially all of its investment (unless there has been credit deterioration). O They have fixed or determinable payments. They are not quoted in an active market. ( Previousarrow_forwardDefault Pay Yourself First Interest [Choose ] [Choose ] is a strategy in which saving is prioritized and made an essential cost in a budget occurs when a borrower is unable to meet the obligation of debt repayment. is the money that a borrower owes to a lender. It can be accrued through any form of borrowing credit cards, mortgages, p- is money received through sources such as employment, investments, or business transactions. is the percentage of a loan principal that lenders charge borrowers. is money set aside for big, unexpected expenses such as job loss or large medical bills. It provides a financial buffer that shie is a plan for using income to meet financial obligations. It tracks how much income a person receives and details how that mo is the amount of money due to a loan before interest. is a financial arrangement in which money is borrowed for a purchase and paid back at a later date. It allows consumers to mo One of the most basic concepts of personal finance is being able…arrow_forwardQuestion 10 Which of the following is NOT benefit of an incentive compatible contract? 1.Car drivers may get a lower insurance premium because of a larger deductible. 2. Some borrowers may be able to get loan only because the contract reassures the lender of repayment. 3. The Principal can spend less monitoring and share some of this savings with the Agent. 4. Fewer transactions between Principals and Agents will take place.arrow_forward
- 2. Protecting Interest Income/Revenue• From the banker’s point of view, when the banker quotes a floating interest, in doingso, the banker is passing on the interest rate risk to the borrower.• What if the banker has to quote a fixed interest rate but his cost of funds are floating?In this case, the customer/borrower faces no risk but the banker does.• Example: As a Credit Officer bank you have agreed to provide a customer with a fixedrate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12%annual interest rate.• The following quotes are available in the market.3-month KLIBOR = 9 %3-month KLIBOR futures = 90.0 (matures in 90 days) How would you protect yourself from a rise interest rates?arrow_forward2. Protecting Interest Income/Revenue• From the banker’s point of view, when the banker quotes a floating interest, in doingso, the banker is passing on the interest rate risk to the borrower.• What if the banker has to quote a fixed interest rate but his cost of funds are floating?In this case, the customer/borrower faces no risk but the banker does.• Example: As a Credit Officer bank you have agreed to provide a customer with a fixedrate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12%annual interest rate.• The following quotes are available in the market.3-month KLIBOR = 9 %3-month KLIBOR futures = 90.0 (matures in 90 days)Explain.How would you protect yourself from a rise interest rates?arrow_forward4. How can effective APR differ from nominal interest? A. Effective APR takes loan fees into account, while nominal interest does not. B. Effective APR will always be less than the nominal interest rate. C. Effective APR is less accurate than the nominal interest rate. D. Nominal interest takes loan fees into account, while effective APR does not.arrow_forward
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