PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 19, Problem 2PS
WACC The WACC formula seems to imply that debt is “cheaper” than equity—that is, that a firm with more debt could use a lower discount rate. Does this make sense? Explain briefly.
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p18
Which of the following is true of debt financing?
Firms whose sales are very stable are more likely to rely on debt financing than firms whose sales are volatile.
Firms that pay dividends are more likely to use less debt financing than firms that retain most of their current earnings.
Firms that are subject to a great degree of operating leverage are more likely to use debt financing than firms that don’t utilize fixed costs.
All of the above
The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity. true or false explain
Choose option a,b,c,d,e for the following:
Question 6 -
A higher financial risk:
a. Arises when the debt – equity ratio is reduced.
b. Can avert financial distress.
c. Will cause the shareholders to expect lesser return.
d. Indicates an inefficient use of fixed cost assets.
e. Indicates an inefficient use of fixed cost funds.
Chapter 19 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - You are considering a five-year lease of office...Ch. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - WACC Whispering Pines Inc. is all-equity-financed....Ch. 19 - WACC Table 19.3 shows a book balance sheet for the...Ch. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - Prob. 8PS
Ch. 19 - WACC Nevada Hydro is 40% debt-financed and has a...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - APV Consider a project lasting one year only. The...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - Prob. 17PSCh. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 20PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 26PSCh. 19 - Prob. 27PS
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- Select all that are true with respect to discount rates: Group of answer choices The cost of equity rises as you add leverage to the capital structure because the risk to equity rises as you add leverage. In a CAPM world, the Beta of equity rises as you add leverage to the capital structure. The appropriate discount rate for a project should reflect the systematic risk of the expected cash flows of that project. If the firm has positive debt, then the cost of debt is less than the WACC and the WACC is less than the cost of equity. The appropriate discount rate for a project that has the same risk as the overall firm is the firm’s WACC. The appropriate discount rate for a project that has the same risk as the firm’s equity is the firm’s cost of equity.arrow_forwardDebt allows an economy to appear very large but debt also creates more ____ in an economy. Inevitability Surety Certainty Risk Businessarrow_forward6. What is the difference between yield to maturity on outstanding debt and coupon rate? Which is a better measure of cost of debt between the two? 7. How is COST OF preferred equity computed?arrow_forward
- p14 More profitable firms have less debt, which supports the trade-off theory. True Falsearrow_forwardIt is often argued that debt becomes a more attractive mode of financing than equity as interest rates decline and a less attractive mode when interest rate increases. Is this true? Explain.arrow_forward4. Explain or illustrate before-tax cost of debt and after-tax cost of debt. 5. What are the relationships between: a) interest rate and cost of debt; b) default risk and cost of debt; and c) bond rates and interest rates? 6. What is the difference between yield to maturity on outstanding debt and coupon rate? Which is a better measure of cost of debt between the two? 7. How is COST OF preferred equity computed?arrow_forward
- An inverted yield curve Part 1 A. results when investor demand for longer maturities exceeds the demand for shorter maturities. B. rewards longterm investors for the additional risk they are assuming. C. sometimes results from actions by the Federal Reserve to control inflation. D. means that longterm bonds are yielding more than shortterm bonds.arrow_forwardBoth EV-to-EBITDA and PE multiples can be linked to interest rates through the discount rate used in discounted cash flow valuation. Holding all else equal, when discount rates are higher, valuation ratios are lower. Perhaps because of this, we tend to see stock prices as well as, the value of private business transactions decline when interest rates increase. Macroeconomists like to describe interest rates as consisting of two components: the real interest rate component and an expected inflation component. In some situations, increases in interest rates are the result of an increasing real interest rate; in other situations, the cause of an interest rate increase is an increase in expected inflation. How might valuation ratios be expected to respond to an interest rate increase generated by an increase in expected inflation versus an interest rate increase that represents an increase in real interest rates?arrow_forwardLeverage. Suppose that a firm has both floating-rate and fixed-rate debt outstanding. What effect will a decline in market interest rates have on the firm's times interest earned ratio? On the market-value debt-to-equity ratio? On the basis of these answers, would you say that leverage has increased or decreased?arrow_forward
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