Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 28, Problem 16PS
Summary Introduction
To discuss: The impact of falling rate of interest on time interest earned ratio and ratio of market value of that debt to equity and whether the leveraged increased or decreased.
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Assume 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?
Leverage. 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?
Assume 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?
Chapter 28 Solutions
Principles of Corporate Finance
Ch. 28 - Prob. 1PSCh. 28 - Performance measures Keller Cosmetics maintains an...Ch. 28 - Performance measures Table 28.8 gives abbreviated...Ch. 28 - Performance measures Describe some alternative...Ch. 28 - Financial ratios Look again at Table 28.8, which...Ch. 28 - Prob. 6PSCh. 28 - Financial ratios True or false? a. A companys...Ch. 28 - Financial ratios Sara Togas sells all its output...Ch. 28 - Financial ratios As you can see, someone has...Ch. 28 - Prob. 10PS
Ch. 28 - Prob. 11PSCh. 28 - Prob. 12PSCh. 28 - Prob. 13PSCh. 28 - Prob. 14PSCh. 28 - Prob. 15PSCh. 28 - Prob. 16PSCh. 28 - Prob. 17PSCh. 28 - Prob. 18PSCh. 28 - Prob. 19PSCh. 28 - Prob. 20PSCh. 28 - Prob. 21PSCh. 28 - Prob. 22PSCh. 28 - Prob. 23PSCh. 28 - Prob. 25PSCh. 28 - Prob. 26PSCh. 28 - Prob. 27PS
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- Is the debt level that maximizes a firm's expected EPS the same as the one that maximizes its stock price? Explain. Explain how a firm might shift its capital structure so as to change its weighted average cost of capital (WACC). What would be the impact on the value of the firm?arrow_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? Start a New Threadarrow_forwardGiven that a firm is well within its current ratio and debt ratio covenants and that interest rates are expected to decrease, would the firm prefer to use short or long-term financing for its external needs and why?arrow_forward
- Is there a readily recognisable debt-to-equity ratio that maximises a firm's value? What are your reasons for or against?arrow_forwardWhat happens to ROE for Firm U and Firm L if EBIT falls to $1,600? What happens if EBIT falls to $1,200? What is the after-tax cost of debt? What does this imply about the impact of leverage on risk and return?arrow_forwardWhy does the WACC decrease as a firm begins to take on debt and then increase after a certain point?arrow_forward
- a. Explain how do analysts use ratios to analyse a firm’s leverage? Which ratios convey more important information to a credit analyst those revolving around the levels of indebtedness or those measuring the ability to service debt? What is the relationship between a firm’s level of indebtedness and risk? What must happen in order for an increase in leverage to be successful? Discuss and illustrate all your answer.arrow_forwardHow can inflation affect the comparability of financial ratios between firms? Explain your answerarrow_forwardWould the market-value debt ratio tend to be higher than the book-value debt ratioduring a stock market boom or a recession? Explain.arrow_forward
- Why is EBIT generally considered independent of financial leverage? Why might EBITactually be affected by financial leverage at high debt levels?arrow_forwardWould the yield spread on a corporate bond over a Treasury bond with the same maturitytend to become wider or narrower if the economy appeared to be heading toward a recession?Would the change in the spread for a given company be affected by the firm’s creditstrength? Explain.arrow_forwardWhich of the following statements is true? A. The percentage decrease in value when the yield-to-maturity (YTM) increases by a given amount is smaller than the increase in value when the yield-to-maturity (YTM) decreases by the same amount. B. Ratio analysis expands GAP analysis to focus on the sensitivity of bank profits across different interest rate environments. C. The repurchase price is smaller than the selling price and accounts for the interest charged by the buyer, who is lending funds to the seller with the security as collateral. D. The issuers or the firms issuing the bonds are rated on their junior unsecured debt.arrow_forward
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