Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 29, Problem 26PS
- a. No external debt or equity is to be issued?
- b. The firm maintains a fixed debt ratio but issues no equity?
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Students have asked these similar questions
Why does the WACC decrease as a firm begins to take on debt and then increase after a certain point?
The sustainable growth rate of a firm is best described as the
A) minimum growth rate achiovable if the fim does not pay out any cash dividends
B) minimum growth rate achievable if the firm maintains a constant equity multiplier.
C) maximum growth rate achievable without external financing of any kind.
D) maximum growth rate achievable without using any external equity financing while maintaining a constant debt-equity ratio.
WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT?
A. IF A FIRM'S EXPECTED BASIC EARNING POWER (BEP) IS CONSTANT FOR ALL ITS ASSETS AND EXCEES INTEREST RATE ON ITS DEBT, THEN ADDING ASSETS FINANCING THEM WITH DEBT WILL RAISE THE FIRM'S EXPECTED RATE OF RETURN ON COMMON EQUITY (ROE)?
B. THE HIGHER ITS TAX RATE, THE LOWER A FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT.
C. THE HIGHER THE INTEREST RATE ON ITS DEBT, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT.
D. THE HIGHER ITS DEBT RATIO, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT.
E. STATEMENT A IS FALSE, BUT B, C AND D ARE ALL TRUE.
Chapter 29 Solutions
Principles of Corporate Finance
Ch. 29 - Sources and uses of cash State whether each of the...Ch. 29 - Sources and uses of cash Table 29. 11 shows...Ch. 29 - Prob. 3PSCh. 29 - Sources and uses of cash and working capital...Ch. 29 - Prob. 5PSCh. 29 - Prob. 6PSCh. 29 - Cash cycle A firm is considering several policy...Ch. 29 - Collections on receivables Here is a forecast of...Ch. 29 - Collections on receivables If a firm pays its...Ch. 29 - Forecasts of payables Dynamic Futon forecasts the...
Ch. 29 - Cash budget Table 29.13 lists data from the budget...Ch. 29 - Short-term financial plans a. Paymore places...Ch. 29 - Short-term financial plans Which items in Table...Ch. 29 - Short-term financial plans Work out a short-term...Ch. 29 - Prob. 16PSCh. 29 - Prob. 17PSCh. 29 - Long-term financial plans Corporate financial...Ch. 29 - Prob. 19PSCh. 29 - Prob. 20PSCh. 29 - Long-term financial plans Construct a new model...Ch. 29 - Long-term financial plans a. Use the Dynamic...Ch. 29 - Long-term financial plans Table 29.15 summarizes...Ch. 29 - Long-term financial plans Abbreviated financial...Ch. 29 - Prob. 25PSCh. 29 - Forecast growth rate What is the maximum possible...Ch. 29 - Forecast growth rate a. What is the internal...Ch. 29 - Forecast growth rate Bio-Plasma Corp. is growing...Ch. 29 - Long-term plans Table 29.18 shows the 2019...
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- Which of the following is the correct definition for the sustainable growth rate? a. The maximum possible growth rate for a firm that issues no new equity and maintains its capital structure. b. The maximum possible growth rate for a firm that raises no external financing c. The maximum possible growth rate for a firm can sustain d. The maximum possible growth rate for a firm that issues no external financing and maintains a constant debt ratio. Please explain why the selections are true or fallse.arrow_forwardCan you please answer this part c follow up question: c) Suppose the initial £90,000 is raised by borrowing at the risk-free interest rateinstead of issuing equity. What are the cash flows to equity and debt holders, andwhat is the initial value of the levered equity according to Modigliani and Miller’sPropositions? Is the company’s cost of equity the same as before? Overall, can thecompany raise the same amount of capital as before? Explain your reasoning.arrow_forwardUse the following information to value a firm’s assets. Assume the following: the market value of the firm's assets is expected to remain constant over time so the firm doesn't grow and can be valued as a level perpetuity, the firm has a constant debt-to-assets ratio, the bonds are priced at par, and the stock's expected capital returns are zero. Relevant data: The number of shares on issue is 1 million and the number of bonds is 800,000 The constant annual dividend per share is $3 The bonds have an annual fixed coupon payment of $2.50 10-year government bonds have a yield of 2% and the market risk premium is 5% The beta of levered equity is 1.2 The beta of the bonds is 0.9 Which of the following is the market value of the levered firm’s assets? a. $68.3 million b. $21.2 million c. $70.1 million d. $42.9 million e. $54.7 millionarrow_forward
- 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?arrow_forwardWhich one of the following is the maximum growth rate that a firm can achieve without any additional external financing? A. External growth rate B. Internal growth rate C. DuPont rate D. Cash flow ratearrow_forwardA6) Finance 1. What of the following statements is not correct? _____ the higher the sales growth rate g is, the larger AFN will be—other things held constant. The higher the capital intensity ratio, the larger AFN will be—other things held constant. The higher the firm’s spontaneous liabilities, the smaller AFN will be—other things held constant. The higher the payout ratio, the larger AFN will be if other things held constant.arrow_forward
- Which of the following statements is not correct? The higher the sales growth rate g is, the larger AFN will be—other things held constant. The higher the capital intensity ratio, the larger AFN will be—other things held constant. The higher the firm’s spontaneous liabilities, the smaller AFN will be—other things held constant. The higher the payout ratio, the smaller AFN will be if other things held constant.arrow_forwardHolding assets constant, if debt increases, A. The firms ROA declines B. The firms net income would increase C. The firms leverage ratio increases D. The firms ROE declinesarrow_forwardBelow is the most recent financial information for Excellent Books Company. If the firm decides to maintain a constant debt-to-equity ratio, what is the rate of growth that it can maintain? The assumptions for this question are as follows: (1) Profit margin is constant (II) Asset accounts vary directly with sales (III) Dividend payout ratio is constant (IV) The firm can only issue debt to finance growth and no stocks will be issued or repurchased t (V) Average tax rate is constant Revenues COGS Depreciation Income Statement (in thousands) EBIT Interest Taxable Income Taxes (21%) Net Income Dividends (Payout Ratio- 30%) Additions to Retained Earnings Year 2022 1543.00 760.00 40.00 743.00 48.00 695.00 145.95 549.05 164.72 384.34 Year 2022 Current Assets Net Fixed Assets Total Assets 650 1,800 2,450 Balance Sheet (in thousands) Year 2022 Accounts Payable Long term debt Shareholders' Equity Total Lia & Eq 350 790 1,310 2,450arrow_forward
- Give typing answer with explanation and conclusion A firm currently has a debt-equity ratio of 2/5. The debt, which is virtually riskless, pays an interest rate of 4 %. The expected rate of return on the equity is 13 %. What is the Weighted-Average Cost of Capital if the firm pays no taxes? Enter your answer as a percentage rounded to two decimal places. Do not include the percentage sign in your answer.arrow_forwardA firm plans to grow at an annual rate of at least 16%. Its return on equity is 24%. Suppose the firm has a debt-equity ratio of 1/3. What is the maximum dividend payout ratio it can maintain without resorting to any external financing? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Answer is complete but not entirely correct. 33.33 X % Maximum dividend payout ratioarrow_forwardThis question is related to Chapter 18 of Berk & Demarzo "Capital Budgeting and Valuation with Leverage". How do the calculations of the firm value using the APV method differ between the following assumptions? The growth rate of the EBIT and the debt-equity ratio will be constant The growth rate of the EBIT and the interest coverage ratio will be constant. The firm selects the optimal interest coverage ratio and maintains this ratio constant forever (corporate taxes are the only imperfection) Are the values that result different or equal?arrow_forward
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Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY