Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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- Suppose a firm invest in proects that are much riskier than its average investments. Do you think the firm's weighted average cost of capital will be affected? Explain.arrow_forwardConsider the table given below to answer the following question. Asset value Earnings Net investment Free cash flow (FCF) Return on equity (ROE) Asset growth rate Earnings growth rate Present value 1 2 3 4 5 6 7 8 9.00 10.17 11.49 12.99 14.28 15.71 17.28 18.49 1.17 1.32 1.49 1.69 1.86 1.96 2.07 2.13 1.17 1.32 1.49 1.30 1.43 1.57 1.21 1.29 0.39 0.43 0.39 0.86 0.83 0.13 0.13 0.13 0.125 0.12 0.115 0.13 0.10 0.10 0.10 0.07 0.07 0.13 0.13 0.10 0.06 0.06 0.03 0.13 0.13 0.13 0.13 0.13 Year Assuming that competition drives down profitability (on existing assets as well as new investment) to 12.5% in year 6, 12% in year 7, 11.5% in year 8, and 9% in year 9 and all later years. What is the value of the concatenator business? Assume 12% cost of capital. (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) millionarrow_forwardWhich of the below statements does the MM Proposition I predict? A. In a perfect market, the value of a firm is independent of its capital structure B.In a perfect market, the discount rate depends on the capital structure C.In a perfect market, the value of a firm decreases in leverage D.In a perfect market, the NPY of investments depends on the existing debt/equity mixarrow_forward
- The appropriate benchmark for the return on equity is: A)the weighted average cost of capital. B)the cost of equity. C)the interest free rate. D)none of the above.arrow_forwardTo identify the cost of equity, which models are better: The dividend growth model or CAPM-derived cost of equity?arrow_forwardA firm will have a financing _________ whenever projected assets are greater than projected liabilities and equity. This is best remedied with _________. Deficit; line of credit Deficit; special dividend Surplus; line of credit Surplus; special dividendarrow_forward
- -n Weighted average cost of capital (WACC) is the: O A. O B. O C. O D. O E. Average IRR of the firm's current projects. Required rate of return on a firm. Cost of utilizing debt financing. Average rate of return needed to increase the value of a firm's stock. Cost of obtaining equity financing.arrow_forwardIn the Gordon Growth (dividend discount) Model, the growth rate is assumed to be the required return on equity. a. proportional to O b. Blank O c. equal to O d. greater than O e. less thanarrow_forwardDefining capital investment terms Fill in each statement with the appropriate capital investment analysis method: Payback, ARR, NPV, or IRR. Some statements may have more than one answer. a. —–— is (are) more appropriate for long-term investments. b. —–— highlights risky investments. c. —–— shows the effect of the investment on the company’s accrual-based income. d. —–— is the interest rate that makes the NPV of an investment equal to zero. e. —–— requires management to identify the discount rate when used. f. —–— provides management with information on how fast the cash invested will be recouped. g. —–— is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset. h. —–— does not consider the asset’s profitability. i. —–— uses accrual accounting rather than net cash inflows in its computation.arrow_forward
- The cost of a firmʹs equity Group of answer choices a. is independent of the firmʹs capital structure b. will always be higher than the stated interest rate on the financial debt of the firm c. can be substantially higher than the firmʹs weighted average cost of capital d. must always be less than the firmʹs weighted average cost of capitalarrow_forwardGive me accurate answerarrow_forwardWoeBeTide's chief objective is to meet its investment needs and maintain its target debt-equity ratio before paying dividends. WoeBeTide is following a dividend approach. Select one: a. cyclical b. stable C. compromise d. residual e. stochasticarrow_forward
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