EBK FOUNDATIONS OF FINANCE
10th Edition
ISBN: 9780134897288
Author: PETTY
Publisher: VST
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Textbook Question
Chapter 9, Problem 13SP
- a. Rework Problem 9-12 as follows: Assume an 8 percent coupon rate. What effect does changing the coupon rate have on the firm’s after-tax cost of capital?
- b. Why is there a change?
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Which of the following statements is most correct? (Hint: Work Problem 4-16 before answering 4-17, and consider the solution setup for 4-16, as you think about 4-17.)
a. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will raise the firm'
expected 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 a firm's BEP ratio will be, other things held constant.
d. The higher its debt ratio, the lower a firm's BEP ratio will be, other things held constant.
e. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will decrease the
firm's expected return on common equity (ROE).
a) If the firm’s cost of capital is 8 percent which investment should the firm make according to net present value? Explain.
b) If the firm’s cost of capital is 8 percent what is the internal rate or return (IRR) for the two investments? Which investment should the firm make? Explain.
8. The company’s cost of capital is also known as
A. hurdle rate
B. leverage rate
C. return rate
D. coupon rate
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Please explain step by step without table and graph thankyou
Chapter 9 Solutions
EBK FOUNDATIONS OF FINANCE
Ch. 9 - Define the term cost of capital.Ch. 9 - Prob. 2RQCh. 9 - Why do firms calculate their weighted average cost...Ch. 9 - Prob. 4RQCh. 9 - Prob. 5RQCh. 9 - Prob. 6RQCh. 9 - Prob. 7RQCh. 9 - Prob. 1SPCh. 9 - Prob. 2SPCh. 9 - (Cost of equity) In the spring of 2018, the Brille...
Ch. 9 - Prob. 4SPCh. 9 - Prob. 5SPCh. 9 - Prob. 6SPCh. 9 - Prob. 7SPCh. 9 - (Cost of internal equity) Pathos Co.s common stock...Ch. 9 - (Cost of equity) The common stock for the Bestsold...Ch. 9 - Prob. 10SPCh. 9 - Prob. 11SPCh. 9 - Prob. 12SPCh. 9 - a. Rework Problem 9-12 as follows: Assume an 8...Ch. 9 - (Capital structure weights) Wingate Metal...Ch. 9 - (Weighted average cost of capital) The capital...Ch. 9 - Prob. 17SPCh. 9 - Prob. 18SPCh. 9 - Prob. 19SPCh. 9 - (Divisional costs of capital and investment...Ch. 9 - Prob. 21SPCh. 9 - Prob. 2.1MCCh. 9 - If you were to evaluate divisional costs of...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
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- c. 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_forward1. Using the Capital Asset Pricing Model (CAPM), what's this company's cost of common equity? ·Expected market return = 10% Risk-free rate = 4% Beta = 1.3arrow_forwardWhen a lump sum investment shows growth, even if the interest rate stays low, it is known as.. 1- discount rate 2-opportunity cost 3-return on investement 4-compounding growtharrow_forward
- How 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_forward9) In DCF valuation, a company can increase its return on equity (ROE) by increasing its leverage ratio (D/E) if and only if its return on capital (ROC) exceeds the after-tax cost of debt (r_d x (1-Tc)). (Assume all other inputs are fixed.) True or false?arrow_forwardConsider the following scenario and complete the last column and then Assess the sensitivity of the price-earnings ratio to changes in the cost of equity capital and changes in the growth rate: Table 9 Estimating price earning(P/E) ratios under various scenarios Scenario Cost of Equity Capital Growth Rate in Earnings P/E Ratio 1 0.13 0.09 2 0.13 0.11 3 0.15 0.09 4 0.18 0.09 5 0.18 0.11arrow_forward
- In a few sentences, answer the following question as completely as you can. Why should financial decision makers obtain a good estimate of a firm’s cost of capital? What are the consequences of using a discount rate that is higher or lower than a firm’s true required return?arrow_forwardWhich of the following statements is true? Question 3Select one: a. The inflation rate is a measure of how much providers of capital expect the purchasing power of their investment to grow. b. The real cost of capital is a measure of how much providers of capital expect the purchasing power of their investment to grow. c. The real cost of capital is a measure of how much providers of capital expect their wealth, as measured by the number of dollars they have, to grow. d. The nominal cost of capital is a measure of how much providers of capital expect the purchasing power of their investment to grow.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
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