Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 2, Problem 5PS
- a. Equals the interest rate at which the company can borrow.
- b. Depends on the risk of the cash flows to be valued.
- c. Depends on the rates of return that shareholders can expect to earn by investing on their own.
- d. Equals zero if the firm has excess cash in its bank account and the bank account pays no interest.
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Students have asked these similar questions
1. Opportunity cost of capital (S2.1) Which of the following statements are true? The opportunity cost of capital:
a. Equals the interest rate at which the company can borrow.
b. Depends on the risk of the cash flows to be valued.
c. Depends on the rates of return that shareholders can expect to earn by investing on their own.
d. Equals zero if the firm has excess cash in its bank account and the bank account pays no interest.
1 . what are the functions of working capital?
2. what factors determine the need cash in the firm's operations?
3. why are accounts receivables inevitable? what advantage do selling on account offer?
When we compute the EV/EBITDA multiple, i.e. the ratio of Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization, we
estimate the enterprise value of a firm by adding the values of debt and equity and netting out cash. Could you provide a reason for netting out
cash?
O a. Cash can be used to pay down debt.
O b.
Cash is easy to value.
O c.
None of the given answers is correct.
The income from cash is not part of EBITDA.
Cash is liquid.
O d.
O e.
Chapter 2 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 2 - (FV) In 1880, five aboriginal trackers were each...Ch. 2 - Prob. 2SQCh. 2 - (PV) Your company can lease a truck for 10,000 a...Ch. 2 - (RATE) Ford Motor stock was one of the victims of...Ch. 2 - Prob. 5SQCh. 2 - Prob. 6SQCh. 2 - Prob. 8SQCh. 2 - (NOMINAL) What monthly compounded interest rate...Ch. 2 - Future values If you invest 100 at an interest...Ch. 2 - Discount factors If the PV of 139 is 125, what is...
Ch. 2 - Prob. 3PSCh. 2 - Prob. 4PSCh. 2 - Opportunity cost of capital Which of the following...Ch. 2 - Perpetuities An investment costs 1,548 and pays...Ch. 2 - Growing perpetuities A common stock will pay a...Ch. 2 - Prob. 8PSCh. 2 - Present values What is the PV of 100 received in:...Ch. 2 - Continuous compounding The continuously compounded...Ch. 2 - Compounding intervals You are quoted an interest...Ch. 2 - Future values and annuities a. The cost of a new...Ch. 2 - Prob. 13PSCh. 2 - Present values A factory costs 800,000. You reckon...Ch. 2 - Present values A machine costs 380,000 and is...Ch. 2 - Opportunity cost of capital Explain why we refer...Ch. 2 - Present values A factory costs 400,000. It will...Ch. 2 - Present values and opportunity cost of capital...Ch. 2 - Prob. 19PSCh. 2 - Prob. 20PSCh. 2 - Annuities David and Helen Zhang are saving to buy...Ch. 2 - Annuities Kangaroo Autos is offering free credit...Ch. 2 - Present values Recalculate the NPV of the office...Ch. 2 - Prob. 24PSCh. 2 - Prob. 25PSCh. 2 - Continuous compounding How much will you have at...Ch. 2 - Perpetuities You have just read an advertisement...Ch. 2 - Compounding intervals Which would you prefer? a....Ch. 2 - Compounding intervals A leasing contract calls for...Ch. 2 - Annuities Several years ago, The Wall Street...Ch. 2 - Prob. 31PSCh. 2 - Prob. 32PSCh. 2 - Prob. 33PSCh. 2 - Prob. 34PSCh. 2 - Prob. 35PSCh. 2 - Amortizing loans Suppose that you take out a...Ch. 2 - Prob. 37PSCh. 2 - Annuities Use Excel to construct your own set of...Ch. 2 - Declining perpetuities and annuities You own an...
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- 7. The internal rate of return (IRR) can best be described as: A. the discount rate at which a set of cash flows have a zero net present value B. the discount rate at which a set of cash flows have a positive net present value c. the rate which the business has to pay to raise finance for an investment the return required by the managers of the business D.arrow_forwardWhat does a positive operating cash flow mean for a company? What do a positive cash flow from assets, a positive cash flow to creditors and a positive cash flow to stockholders mean? What do these positive cash flows mean for an expansion plan financed by debt and equity?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_forward
- The company cost of capital: measures the return that investors require from the company. is measured using security book values. depends on historical profits and cash flows. O depends on current profits and cash flows.arrow_forwardHow do I calculate a company’s free cash flow if it is all-equity financed?arrow_forwardWhich of the following is true regarding a company assuming more debt? Select one: a. Assuming more debt is always bad for the company b. Assuming more debt reduces leverage c. Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds d. Assuming more debt is always good for the companyarrow_forward
- 1. Which of the following is not a component used in calculating the cost of capital? A. The cost of short-term debt. B. The cost of common stock. C. The cost of long-term debt. D. The cost of retained earnings. 2. Which of the following statements about cost of capital is false? A. The overall cost of capital is the minimum rate a firm must earn on all investments to cover capital costs. B. The overall cost of capital is the cost of the firm's equity capital at which the market value of the firm will remain unchanged. C. Cost of capital is based on what the company pays for its capital, not the return earned on the capital employed. D. The overall cost of capital is the weighted average cost of the various debt and equity components in a firm's capital structure.arrow_forwardIf the cost of borrowing is lower than the operating return .. business by increasing borrowing in its capital structure a. no change in the return on equity b. Increase the return on equity c. Reduction in the return on equity d. Change in the return on equity in an indefinite manner e. nonearrow_forwardThe cost of equity is ________. Group of answer choices 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_forward
- The cost of capital can be thought of as the rate of return required by investors in the firm's securities. O a. false O b. truearrow_forwardWhat rate do investors use to discount the capital gains and cash flows of firms?arrow_forwardWhat is the blend of long-term financial sources used to finance the firm which may include debt, equity and preferred stock? اخترأحد الخيارات a. Risk and Return b. Capital Budgeting c. Profit Maximization d. None of the option e. Working Capital Creditors look for a. Net working capital for their safety b. High net working capital for their safety c. Less net working capital for their safety d. None of the options e. Balance net working capital for their safetyarrow_forward
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