Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Question
Chapter 18.8, Problem 2CC
Summary Introduction
To discuss: Whether the WACC method can be applied for the firm’s debt–equity ratio over times.
Introduction:
The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.
Weighted Average Cost of Capital: (WACC) is the rate that a company is expected to pay, on an average, to all the security holders in order to finance its assets.
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Students have asked these similar questions
Is there a readily recognisable debt-to-equity ratio that maximises a firm's value? What are your reasons for or against?
What are the charateristics of Debt financing and Equity fianancing? If a company wanted to maximize EPS (Earning per Share), which form of financing might they likely consider, debt or equity? Explain.
Which one of the following factors would likely cause a firm to increase its use of debt financing as measured by the debt to total capital ratio?
A.Increased economic uncertainty.
B.An increase in the degree of operating leverage.
C.An increase in the corporate income tax rate.
D.An increase in the price-earnings ratio.
Chapter 18 Solutions
Corporate Finance
Ch. 18.1 - What are the three methods we can use to include...Ch. 18.1 - Prob. 2CCCh. 18.2 - Prob. 1CCCh. 18.2 - Prob. 2CCCh. 18.3 - Prob. 1CCCh. 18.3 - Prob. 2CCCh. 18.4 - Prob. 1CCCh. 18.4 - Prob. 2CCCh. 18.5 - How do we estimate a projects unlevered cost of...Ch. 18.5 - What is the incremental debt associated with a...
Ch. 18.6 - Prob. 1CCCh. 18.6 - Prob. 2CCCh. 18.7 - How do we deal with issuance costs and security...Ch. 18.7 - Prob. 2CCCh. 18.8 - When a firm has pre-determined tax shields, how do...Ch. 18.8 - Prob. 2CCCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - Prob. 3PCh. 18 - Prob. 4PCh. 18 - Prob. 5PCh. 18 - Prob. 6PCh. 18 - Prob. 7PCh. 18 - Prob. 8PCh. 18 - Prob. 9PCh. 18 - Prob. 10PCh. 18 - Prob. 11PCh. 18 - Prob. 12PCh. 18 - Prob. 13PCh. 18 - Prob. 14PCh. 18 - Prob. 15PCh. 18 - Prob. 16PCh. 18 - Prob. 17PCh. 18 - Prob. 18PCh. 18 - Prob. 19PCh. 18 - Prob. 20PCh. 18 - Prob. 21PCh. 18 - Prob. 22PCh. 18 - Prob. 23PCh. 18 - Prob. 24PCh. 18 - Prob. 25PCh. 18 - Prob. 26P
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- Is the debt level that maximizes a firm’s expected EPS the same as the debt level that maximizesits stock price? Explain.arrow_forwardIs there an easily identifiable debt-equity ratio that will maximize the value of the firm？support answers with examples. pls give detailsarrow_forwardIs there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not? You need to support your answers with examples.arrow_forward
- Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity?arrow_forwardWhich of the following will increase a firm's aftertax cost of debt financing? Select one: a. increase in a bond's current market price b. decrease in the corporate tax rate c. increase in the dividend yield d. decrease in the market rate of interestarrow_forwardAssume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?arrow_forward
- An investor worried about a company’s long-term solvency would most likely examine its:C . debt-to-equity ratioarrow_forwardWhat is the debt ratio at the optimal capital structure of XYZ Inc.?arrow_forwardWhy does the WACC decrease as a firm begins to take on debt and then increase after a certain point?arrow_forward
- According to Modigliani & Miller M Proposition II (MM Il), as a firm's debt-equity ratio decreases, what happens to the required rate of return on equity? Briefly explain including the key aspect of MM II.arrow_forwardFrom the scenario, determine the Market value of the firm's equity, the market value of the firm's debt, the cost of equity (required rate of return), cost of debt (yield to maturity on existing debt) and the corporate tax rate.arrow_forwardExplain briefly how WACC is related to the level of leverage (debt/equity ratio) of a firm. What are the key differences between the main capital structure theories?arrow_forward
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