Fundamentals of Corporate Finance
11th Edition
ISBN: 9781259870576
Author: Ross
Publisher: MCG
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Chapter 2, Problem 8CRCT
Net Working Capital and Capital Spending [LO4] Could a company’s change in NWC be negative in a given year? (Hint: Yes.) Explain how this might come about. What about net capital spending?
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Could a company’s change in NWC be negative in a given year? (Hint: Yes.) Explain how this might come about. What about net capital spending?
Consider an economy with distress costs and corporate tax rates. Consider further a firm with EBIT corporate tax rate tau 0.3. What is the optimal leverage ratio (D/V)? 100 constant, rA 10%, rD 5%, distress costs 0.0005*D^2,
H5.
Discuss the following statement: If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change?
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Chapter 2 Solutions
Fundamentals of Corporate Finance
Ch. 2.1 - Prob. 2.1ACQCh. 2.1 - What is liquidity? Why is it important?Ch. 2.1 - What do we mean by financial leverage?Ch. 2.1 - Explain the difference between accounting value...Ch. 2.2 - What is the income statement equation?Ch. 2.2 - Prob. 2.2BCQCh. 2.2 - Why is accounting income not the same as cash...Ch. 2.3 - What is the difference between a marginal and an...Ch. 2.3 - Do the wealthiest corporations receive a tax break...Ch. 2.4 - Prob. 2.4ACQ
Ch. 2.4 - Prob. 2.4BCQCh. 2.4 - Why is interest paid not a component of operating...Ch. 2 - What types of accounts are the most liquid?Ch. 2 - What is an example of a noncash expense?Ch. 2 - The marginal tax rate is the tax rate which...Ch. 2 - Prob. 2.4CTFCh. 2 - Prob. 1CRCTCh. 2 - Accounting and Cash flows [LO2] Why might the...Ch. 2 - Prob. 3CRCTCh. 2 - Operating Cash Flow [LO2] In comparing accounting...Ch. 2 - Prob. 5CRCTCh. 2 - Cash Flow from Assets [LO4] Suppose a companys...Ch. 2 - Prob. 7CRCTCh. 2 - Net Working Capital and Capital Spending [LO4]...Ch. 2 - Prob. 9CRCTCh. 2 - Prob. 10CRCTCh. 2 - Prob. 11CRCTCh. 2 - Earnings Management [LO2] Companies often try to...Ch. 2 - Building a Balance Sheet [LO1] KCCO, Inc., has...Ch. 2 - Building an Income Statement [LO1] Billys...Ch. 2 - Dividends and Retained Earnings [LO1] Suppose the...Ch. 2 - Prob. 4QPCh. 2 - Calculating Taxes [LO3] The Dyrdek Co. had 267,000...Ch. 2 - Prob. 6QPCh. 2 - Calculating OCF [LO4] Ridiculousness, Inc., has...Ch. 2 - Calculating Net Capital Spending [LO4] Bowyer...Ch. 2 - Calculating Additions to NWC [LO4] The 2014...Ch. 2 - Cash Flow to Creditors [LO4] The 2014 balance...Ch. 2 - Cash Flow to Stockholders [LO4] The 2014 balance...Ch. 2 - Prob. 12QPCh. 2 - Market Values and Book Values [LO1] Klingon...Ch. 2 - Prob. 14QPCh. 2 - Using Income Statements [LO1] Given the following...Ch. 2 - Preparing a Balance Sheet [LO1] Prepare a 2015...Ch. 2 - Prob. 17QPCh. 2 - Prob. 18QPCh. 2 - Net Income and OCF [LO2] During 2014, Raines...Ch. 2 - Prob. 20QPCh. 2 - Prob. 21QPCh. 2 - Calculating Cash Flows [LO4] Consider the...Ch. 2 - Net Fixed Assets and Depreciation [LO4] On the...Ch. 2 - Prob. 24QPCh. 2 - Use the following information for Taco Swell,...Ch. 2 - Use the following information for Taco Swell,...Ch. 2 - Prob. 1MCh. 2 - Prob. 2M
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- 1. Why does WACC increase and IRR decrease as the capital budget increases? Are there any steps management can take to reverse these trends?arrow_forwardD6) Suppose there are perfect capital markets with taxes. Investors expect a company to have $120 earnings before interest and taxes in one year. This company has a 25% tax rate, $100 market value of debt, and 20 shares outstanding. This company’s net working capital, depreciation expense, and capital expenditures are all expected to be zero in perpetuity. Investors expect this company to have the same earnings before interest and taxes, market value of debt, tax rate, and number of shares outstanding in perpetuity. The firm’s unlevered cost of equity is 8% and its cost of debt is 5%. Based on this information, what amount would you expect this company’s share price to be closest to? $5 $20 $40 $80 $100 $200 $400arrow_forwardHow would an increase in each of the following factors affect the AFN?1. Payout ratio2. Capital intensity ratio, A0*/S03. Profit margin4. Days sales outstanding, DSO5. Sales growth rateIs it possible for the AFN to be negative? If so, what would this indicate?If excess capacity exists, how would that affect the calculated AFN?arrow_forward
- Q. Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of equity. Company estimates that its WACC is 12%. The capital structure is 75% debt and 25% internal equity. Before tax cost of debt is 12.5 % and tax rate is 20%. Risk free rate is rRF = 6% and market risk premium (rm - rRF ) = 8%: What is the beta of the company?arrow_forwardQ1. A Corporation is trying to determine its optimal capital structure using the following table.The company estimates that the risk-free rate is 5%, the market risk premium is 6%, and its tax rate is 40%. Itestimates that if it had no debt, its beta, would be 1.2. Based on the information, what is the firm’s optimal capitalstructure, and what would the WACC be at the optimal capital structure?arrow_forwardCalculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value?arrow_forward
- p5 In a world with taxes, the value of a leveraged firm equals the value of an unleveraged firm plus: the present value of its debt. the present value of the interest tax shield. the present value of its future cash flows. none of the above.arrow_forwardMo5. can you please help me answer the question below, thank you In an NPV calculation, if the net present value of the future cash flows from an investment are less than the invested capital, it is an investment the firm should not make.arrow_forwardConsider the effect that corporate profit taxes have on investing. Look back at Figure 15.4. Suppose that the r line is the rate of return a firm earns before taxes. If corporate profit taxes are imposed, the firm’s after-tax returns will be lower (and the higher the tax rate, the lower the after-tax returns). If the firm’s decisions about R&D spending are based on comparing after-tax returns with the interest-rate cost of funds, how will increased corporate profit taxes affect R&D spending? Does this effect modify your views on corporate profit taxes? Discuss.arrow_forward
- 1. (Without loss of generality assume that the expected/maximal exposures mentioned here correspond to a single time point in future, T.) Bank A uses for economic capital (EC) a measure equal to: 1.4 * EPE. Bank B, instead, uses the weighted average: 70% * EPE + 30% * ME. How small (or, indeed, how big?) does the ME (maximal exposure) need to be, relative to the EPE, for Bank A to end up putting aside (for this specific EC aspect) more EC than Bank B?arrow_forward16) Which of the following is the significance of Capital Budgeting? a. Irreversible b. All the options c. Long term effect d. Growtharrow_forward
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