PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Textbook Question
Chapter 9, Problem 14PS
Company cost of capital You are given the following information for Golden Fleece Financial:
Calculate Golden Fleece’s company cost of capital. Ignore taxes.
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1.Describe the components included in weighted average cost of capital. How do you determine a "good" cost of capital? Identify the factors that may affect a company’s cost of capital.
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Factors that affect the cost of capital equation
Each of the following factors affects the weighted average cost of capital (WACC) equation. Which of the following factors are outside a firm’s control? Check all that apply.
The general level of stock prices
The effect of the tax rate on the cost of debt in the weighted average cost of capital equation
The firm’s capital structure
The impact of a firm’s cost of capital on managerial decisions
Consider the following case:
Acme Manufacturing Corporation has two divisions, L and H. Division L is the company’s low-risk division and would have a weighted average cost of capital of 8% if it was operated as an independent company. Division H is the company’s high-risk division and would have a weighted average cost of capital of 14% if it was operated as an independent company. Because the two divisions are the same size, the company has a composite weighted average cost of capital of 11%. Division L is…
How do flotation costs affect the cost of capital?Are these costs about the same for each of thethree capital components? How do they change asthe firm raises larger and larger amounts of capital,and how do flotation costs affect the way a company raises capital from year to year?
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Company cost of capital Suppose a firm uses its...Ch. 9 - Prob. 2PSCh. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 6PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Asset betas Which of these projects is likely to...
Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - Measuring risk The following table shows estimates...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Measuring risk Look again at Table 9.1. This time...Ch. 9 - Prob. 16PSCh. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 22PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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- The cost of equity is _______. A. the interest associated with debt B. the rate of return required by investors to incentivize them to invest in a company C. the weighted average cost of capital D. equal to the amount of asset turnoverarrow_forwardWhen placed in the context of looking at a company's capital structure, are there different forumulas you can use to find Weighted Average Cost of Capital and does the company being levered or unlevered make a difference?arrow_forwardBased on M&M with taxes and without taxes, how much time should a financial manager spend analyzing the capital structure of their firm?arrow_forward
- Contrast and compare sources of business finance and assess various determinants of the cost of capital. Explain how the cost of capital of a business is important in making financial decisions (500w)arrow_forwardCost of capital refers to: a. The cost of borrowing money from financial institutions b. The cost of equity investments in the stock market c. The overall cost of financing a company's operations d. The cost of producing goods and servicesarrow_forwardExplain some of the factors that can affect the cost of capital and describe whether or not it is something that a company can control.arrow_forward
- According to the M&M propositions WITH and WITHOUT taxes, should a financial manager spend time analysing a firm’s capital structure? What is the optimal capital structure with and without tax? Discuss.arrow_forwardThe WACC as used in capital budgeting is an estimate of a company’s before-tax cost of capital. True Falsearrow_forwardWhich statement about the cost of capital is incorrect? * A. If a company’s tax rate increases then, all else equal, its WACC will increase. B. A company’s target capital structure affects its WACC. C. WACC calculations is based on the after-tax costs of all individual capital components. D. Flotation costs can increase the WACC.arrow_forward
- explain the concept of cost of capital and how would you determine the WACC of the firm.arrow_forwardThe cost of equity is ________. a.equal to the amount of asset turnover b.the interest associated with debt c.the weighted average cost of capital d.the rate of return required by investors to incentivize them to invest in a companyarrow_forwardWhat is meant by Capital Structure of a company? In this context, describe the varioussources of funding available to companies.arrow_forward
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