Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 19, Problem 4PS
Summary Introduction
To determine: WACC (Weighted average cost of capital) with new assumptions using 3 step procedure.
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Students have asked these similar questions
(b)
Assume that: 1) the corporate tax rate is zero, 2) firms stop their business in one year,
3) earnings before interest and taxes in one year are expected to be worth EBIT, 4) the probability
that the levered firm defaults in one year is p, 5) bankruptcy costs are worth BC, 6) face value of
debt is F, and 7) coupon rate is also rB. Provide a formula for the cost of levered equity rs. The
formula has to depend on: S, EBIT, p, BC, F, rB, and ro only.
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
1.
b.
Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
2.
d.
Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
3.
e.
Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
4.
a.
Use cash to increase inventory holdings.
5.
c.
Use cash to repurchase some of the company's own stock.
Marcus Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 21%, answer the following question:
Estimate the present value of all future interest tax savings, assuming that the debt change is permanent.
Group of answer choices
a. 21m
b. 8.4m
c. 0.756m
d. 1.89m
Chapter 19 Solutions
Principles 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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