PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Chapter 28, Problem 26PS
Summary Introduction
To discuss: Some examples of average cost of capital make sense and does not make sense to calculate return on capital.
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The weighted average cost of capital up to the point when retained earnings are exhausted.
The weighted average cost of capital after all retained earnings are exhausted.
What is the effect of an increase in the cost of capital on the payback period, profitability index and accounting rate of return?
Payback period will increase, Profitability will decrease, and Accounting rate of return will increase.
Payback period will not change, Profitability will decrease, and Accounting rate of return will not change.
Payback period will not change, Profitability will increase, and Accounting rate of return will decrease.
Payback period will decrease, Profitability will increase, and Accounting rate of return will decrease.
Assume that each of the following changes is independent (i.e., except for this change, all other factors remain unchanged). In each case. indicate what will happen to the earnings muitiplier and explain why. a. The return on equity increases. b. The debt-equity ratio declines . Overall productivity of capital increases d. The dividend payout ratio declines
Chapter 28 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 28 - Prob. 1PSCh. 28 - Financial ratios Table 28.10 gives abbreviated...Ch. 28 - Performance measures Look again at Table 28.10. At...Ch. 28 - Prob. 5PSCh. 28 - Financial ratios True or false? a. A companys...Ch. 28 - Book rates of return Keller Cosmetics maintains an...Ch. 28 - Prob. 8PSCh. 28 - Prob. 9PSCh. 28 - Prob. 10PSCh. 28 - Prob. 11PS
Ch. 28 - Prob. 12PSCh. 28 - Prob. 13PSCh. 28 - Prob. 14PSCh. 28 - Performance measures Describe some alternative...Ch. 28 - Prob. 16PSCh. 28 - Prob. 17PSCh. 28 - Prob. 18PSCh. 28 - Financial ratios Sara Togas sells all its output...Ch. 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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- Under what situation will return on equity be higher than return on investment? a. When assets exceed liabilities. b. When the debt to equity ratio is greater than 1.0. c. When net income is higher than it was in the previous year. d. When a company earns more on borrowed money than the interest it must pay.arrow_forwardc. Define the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant? Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate, the amount of accounts payable, the profit margin, and the payout ratio.arrow_forwardWhich of the following is true? I. If there is no change in gross fixed assets from one year to the next, then net fixed assets would have to have decreased. II. For firms with lower P/E ratios, investors are valuing each dollar of earnings more than for firms with higher P/E ratios. III. A increase in the current ratio indicates an improvement in a firm's long-term solvency condition.arrow_forward
- if the cash flow is grow for indefinite period then isn't the present value calculated as = Cash Flow of last year / (Cost of equity - Growth Percentage)?arrow_forwardWhich of the following is the correct statement about the inflation figure that is included in the money cost of capital? a. It is expected general inflation suffered by the investors b. It is historic general inflation suffered by the investors c. It is historic and specific to the business d. It is expected and specific to the businessarrow_forwardWhen using the capital asset pricing model to estimate the cost of equity for a firm being valued, beta is often adjusted to account for: Debt ratios of comparable firms that are leveraged differently from that of the firm being valued. The level of cash held at comparable firms. The number of common stock shares outstanding at comparable firms. The default rate of corporate bonds over the last year. All of the above.arrow_forward
- In the real world, we find that dividends usually exhibit greater stability than earnings fluctuate more widely than earnings tend to be a lower percentage of earnings for mature firms are usually changed every year to reflect earnings changes are usually set as a fixed percentage of earningsarrow_forwardTrue or False The CFROI is a measure of the dollar surplus value created by an investment or a portfolio of investments. The cash flow return on investment (CFROI) for a firm is the internal rate of return on existing investments, based on real cash flows. If the gross investment in existing assets is reduced, the CFROI may be increased.arrow_forwardCould 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?arrow_forward
- When the company is working at full capacity, the assets in the AFN equation is the total assets True False Considering each action independently and holding other things constant, which of the following actions would reduce a firm’s need for additional capital? a. An increase in the dividend payout ratio. b. A decrease in the days sales outstanding. c. An increase in expected sales growth. d. A decrease in the profit margin.arrow_forwardThe most important factor to consider when determining the dividends to be declared is a. the impact of inflation on replacement costs b. any future planned use of retained earnings d. the future planned use of cash available at the date of dividend distribution e. shareholders’ expectation about the firms’ profitabilityarrow_forwardYou observe that a firm's ROE has increased from the previous year, but both its profit margin and equity multiplier are below the previous year's levels. Which of the following statements is CORRECT? Its return on assets must be lower than the previous year. Its total assets turnover must be lower than the previous year. Its TIE ratio must be higher than the previous year. Its total assets turnover must be higher than the previous year.arrow_forward
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