Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 16, Problem 15QP
Summary Introduction
To calculate: The equity cost after recapitalization, the WACC (Weighted average cost of capital), and the implications for the capital structure decision of the firm.
Introduction:
M&M proposition I is a proposition, where the firm’s value is independent of the capital structure of the firm.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Question A18
Which of the following is not an advantage of the NPV investment appraisal technique when compared with the ARR investment appraisal technique?
A
It shows the increase in shareholder wealth
B
It considers the time value of money
C
It is more complicated to calculate and understand
D
It allows risk to be factored in by adjusting the cost of capital
Mf4.
Q4.How does the inflation affect a company’s cost of capital? Please include your arguments and examples!
6
P10.4
Unlevering the Equity Cost of Capital-Low Leverage & High Leverage Companies: Below, we show
the information for two potential comparable companies. Calculate the unlevered cost of capital based on the
following assumptions. Neither company expects its free cash flows to grow.
Income tax rate for interest (TINT).
Value of debt
Value of preferred stock.
Value of equity
Maturity of debt (years)
Debt cost of capital.
Preferred stock cost of capital.
Equity cost of capital.
Low Leverage
Company
High Leverage
Company
35.0%
$ 4,000
$ 1,000
$15,000
45.0%
$45,000
$
0
Perpetual
$ 5,000
Perpetual
5.0%
8.0%
6.0%
11.8%
28.0%
a.
b.
C.
Assume that interest is tax deductible and that the discount rate for all interest tax shields is the unlevered
cost of capital.
Assume that interest is tax deductible and that the discount rate for all interest tax shields is the cost of debt.
Assume that interest is tax deductible but that the company refinances its debt at the end of each year
(annual…
Chapter 16 Solutions
Fundamentals of Corporate Finance
Ch. 16.1 - Why should financial managers choose the capital...Ch. 16.1 - What is the relationship between the WACC and the...Ch. 16.1 - What is an optimal capital structure?Ch. 16.2 - Prob. 16.2ACQCh. 16.2 - Prob. 16.2BCQCh. 16.2 - Prob. 16.2CCQCh. 16.3 - What does MM Proposition I state?Ch. 16.3 - What are the three determinants of a firms cost of...Ch. 16.3 - Prob. 16.3CCQCh. 16.4 - What is the relationship between the value of an...
Ch. 16.4 - If we consider only the effect of taxes, what is...Ch. 16.5 - Prob. 16.5ACQCh. 16.5 - What are indirect bankruptcy costs?Ch. 16.6 - Can you describe the trade-off that defines the...Ch. 16.6 - What are the important factors in making capital...Ch. 16.7 - Prob. 16.7ACQCh. 16.7 - What is the difference between a marketed claim...Ch. 16.7 - What does the extended pie model say about the...Ch. 16.8 - Prob. 16.8ACQCh. 16.8 - Why might firms prefer not to issue new equity?Ch. 16.8 - Prob. 16.8CCQCh. 16.9 - Do U.S. corporations rely heavily on debt...Ch. 16.9 - What regularities do we observe in capital...Ch. 16.10 - Prob. 16.10ACQCh. 16.10 - Prob. 16.10BCQCh. 16 - Maximizing what will maximize shareholder value?Ch. 16 - What is most closely related to a firms use of...Ch. 16 - Give an example of a direct cost of bankruptcy.Ch. 16 - Prob. 16.7CTFCh. 16 - Prob. 1CRCTCh. 16 - Prob. 2CRCTCh. 16 - Optimal Capital Structure [LO1] Is there an easily...Ch. 16 - Observed Capital Structures [LO1] Refer to the...Ch. 16 - Financial Leverage [LO1] Why is the use of debt...Ch. 16 - Homemade Leverage [LO1] What is homemade leverage?Ch. 16 - Prob. 7CRCTCh. 16 - Prob. 8CRCTCh. 16 - Prob. 9CRCTCh. 16 - Prob. 10CRCTCh. 16 - Prob. 1QPCh. 16 - Prob. 2QPCh. 16 - Prob. 3QPCh. 16 - Prob. 4QPCh. 16 - MM and Stock Value [LO1] In Problem 4, use MM...Ch. 16 - Prob. 6QPCh. 16 - Prob. 7QPCh. 16 - Prob. 8QPCh. 16 - Homemade Leverage and WACC [LO1] ABC Co. and XYZ...Ch. 16 - Prob. 10QPCh. 16 - MM and Taxes [LO2] In the previous question,...Ch. 16 - Calculating WACC [LO1] Twice Shy Industries has a...Ch. 16 - Calculating WACC [LO1] Braxton Corp. has no debt...Ch. 16 - MM and Taxes [LO2] Meyer Co. expects its EBIT to...Ch. 16 - Prob. 15QPCh. 16 - MM [LO2] Tool Manufacturing has an expected EBIT...Ch. 16 - Prob. 17QPCh. 16 - Homemade Leverage [LO1] The Day Company and the...Ch. 16 - Weighted Average Cost of Capital [LO1] In a world...Ch. 16 - Cost of Equity and Leverage [LO1] Assuming a world...Ch. 16 - Business and Financial Risk [LO1] Assume a firms...Ch. 16 - Stockholder Risk [LO1] Suppose a firms business...Ch. 16 - Prob. 1MCh. 16 - Prob. 2MCh. 16 - Prob. 3MCh. 16 - Stephenson Real Estate Recapitalization Stephenson...Ch. 16 - Stephenson Real Estate Recapitalization Stephenson...
Knowledge Booster
Similar questions
- Is Walmart operating at an optimal capital structure?arrow_forward41) Balancing the advantages and disadvantages of using debt and equity when determining a firm’s optimal capital structure is referred to as: Question 41 options: Tax theory Trade off theory Signaling theory Pecking order theory1arrow_forwardD3) The pecking-order theory of capital structure implies that firms will always prefer to issue debt over equity. Explain why firms might be reluctant to issue equity and what will happen to the stock price if a firm issues equity.arrow_forward
- Question 6 Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? O Payback O Profitability index O Net present value O Internal rate of return O Discounted paybackarrow_forwardFE1 Show your work for problem solving questions. If you use one or more sources of information in preparing any answer, provide an APA-style reference, identify any quoted information, and cite a reference wherever it is used. How would each of the following events change the equilibrium financial market value of a company? (a)an increase in its cost of production; (b) an increase in its cost of financing; (c) an increase in the market’s discount rate; (d) an increase in its sales revenue; and (e) an increase in its projected future profits.arrow_forwardWhy should a firm's investments always exceed its cost of capital?arrow_forward
- Multinational Finance & investment Q2 b) Do you agree with the following statement? And explain why. “The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by welldiversified investors who are concerned with specific risk. “arrow_forward20 The factor affecting a firm's cost of capital that the firm cannot control is: Group of answer choices The investment policy The dividend policy The capital structure Income tax ratesarrow_forwardQuestion 1 Which of the following changes would tend to increase the cost of capital for a traditional firm? Decrease the proportion of equity financing. Increase the market value of the debt. Decrease the proportion of debt financing. Decrease the market value of the equity.arrow_forward
- Q3 How is a firm’s sustainable growth related to its accounting return on equity (ROE)? And What are the determinants of growth? Q4 What are some important elements that are often missing in financial planning models? Why do we say planning is an iterative process Q5 Sales Forecast [LO1] Why do you think most long-term financial planning begins with sales forecasts? Put differently, why are future sales the keyarrow_forwardТOPIC: Q1. Based on the work of MM Propositions, why are levered firms usually more valuable than an otherwise identical unlevered firm? Q2. How does shareholder value relate to capital structure?arrow_forward9. What are the differences between raising capital from a financial institution and raisingfinances directly from the market?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT