S 2 30.A firm uses debt and equity in its capital structure and has positive earnings. Which of thefollowing would increase the firm's WACC, all else the same?A)I. A reduction in the corporate tax rateII. A reduction in the risk aversion of investorsIII. A reduction in the firm's bond rating to junk gradeII onlyC) III onlyI onlyB)D)I and III only3

WACC is the weighted average cost of capital. The company can use debt and equity in different…

A firm uses debt and equity in its capital structure and has positive earnings. Which of the following would increase the firm's WACC, all else the same? I. A reduction in the corporate tax rate II. A reduction in the risk aversion of investors A) III. A reduction B) I only in the firm's bond rating to junk grade II only III only C) D) I and III only

A firm uses debt and equity in its capital structure and has positive earnings. Which of the following would increase the firm's WACC, all else the same? I. A reduction in the corporate tax rate II. A reduction in the risk aversion of investors A) III. A reduction B) I only in the firm's bond rating to junk grade II only III only C) D) I and III only

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 6QE

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3 S1. Although the exact relationship between a firm's degree of financial leverage and its beta is difficult to estimate, it has been shown both theoretically and empirically that a firm's beta increases with its degree of financial leverage. S2. As the debt ratio rises, the WACC is reduced because the after-tax cost of debt is usually lower than the cost of equity. What limits the substitution of debt for equity in the capital structure is that as the debt ratio rises the costs of both components eventually increase. Group of answer choices Statement 1 is true Statement 2 is true Both statements are true Both statements are false
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34. The concept of optimum capital structure is based on the assumption that the prudent use of debt can lower the firm's overall cost of capital True or False 35. The cost of common equity is the most difficult concept to measure True or False 36 The optimum capital structure is the one that? 37. Preferred stock is considered as debt to the extent that preferred dividends are a tax-deductible expense True or False 38. The net cash flows from an investment project 39 Beta may be used to classify stocks into which of the two following categories? 40. The capital budgeting process must follow an ideally prescribed order because there are many steps and elements in the whole process of planning capital expenditures. True or False 41. The nominal rate of interest equals the effective rate of interest only if interest is compounded semiannually True or False 42. Efficient capital markets exist when security prices reflect all available information and market prices adjust slowly to new…
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