If you use market values to calculate the WACC, and your stock price is volatile or bond prices become unstable, will this affect your capital structure and, in turn, the investment decision the firm makes? In other words, can the WACC be volatile?

If you use market values to calculate the WACC, and your stock price is volatile or bond prices become unstable, will this affect your capital structure and, in turn, the investment decision the firm makes? In other words, can the WACC be volatile?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Q: Explain the concept of efficient markets. Are the equity capital markets inefficient?

A: Introduction: The given question is related to the concept of efficient market hypothesis. It is a…

Q: Hedging is a risk management strategy that is used in limiting or offsetting probability of loss…

A: Financial risk managers analyse the market trend and accordingly take financial decisions.Roles and…

Q: ing process, and hence investment markets are efficient, reflecting all available information in…

A: There are many theories in the finance which explain the behavior of investors and the market.

Q: Which of the following statements is FALSE? a) The Capital Asset Pricing Model is the most…

A: Answer:- Cost of capital:- The minimum rate of return or profit that a business must achieve before…

Q: What is risk? Although many risks (e.g., career risk, risk of how many children to have and whether…

A: The risk may be defined as the possibility of uncertain events that can be harmful to the…

Q: Is it reasonable to ignore IDIOSYNCRATIC RISK and care only about MARKET (SYSTEMIC) risk? What about…

A: Definitions Idiosyncratic risk : In simple words, idiosyncratic risk can be understood as the risk…

Q: According to the market segmentation theory, short term-term investors will not normally switch to…

A: Market segmentation theory is also referred to as segmented markets theory.

Q: What happens if someone is not given the Beta for a stock that they are analyzing? Will they still…

A: CAPM described the relationship between systematic risk and expected rate of return. The equation is…

Q: What exactly is a genuine account?

A: Genuine account: Genuine account is generally referred to as a real account. Real accounts are…

Q: What is meant by excessive portfolio turnover? Which behavioral bias is primarily responsible for…

A: Portfolio turnover is a measure of how quickly the management of a fund buy or sell shares over a…

Q: Unsystematic risk is * a.the risk associated with movements in securities prices B.higher when…

A: Risk is referred as uncertainty or loss. Financial risk is referred as the variability of actual…

Q: Why should financial decision makers obtain a good estimate of a firm’s cost of capital? What are…

A: The cost of capital is the cost of using the funds in the business. The funds may be in form of debt…

Q: Which of the following is true? IRR is the only measure that investors focus on when analysing the…

A: The objective of the question is to identify the correct statement about the Internal Rate of Return…

Q: Which is correct about security valuation? A. In an efficient market, several factors would affect…

A: The process that is used in order to determine the fair value of the security, as well as any type…

Q: What happens during periods when the market volatility is so significant? How are large swings dealt…

A: The market volatility is reflective of fluctuation of share prices and there will be increase in…

Q: tock price volatility makes stock options less valuable because of risk aversion O True O False

A: Stock option can be bought with very little premium to be paid.

Q: The Arbitrage Pricing Theorem states that: a)If arbitrage opportunities do not exist then the…

A: Arbitrage pricing theorem or APT states that, Market returns are not perfectly efficient because of…

Q: What is the reason for investors to track moves in the yield curve? Please discuss in more depth and…

A: A yield curve is a graphical representation of the different interest rates that the bonds yield but…

Q: An asset manager and he is overweight in equities because he believes that equities have more upside…

A: There are several ways to hedge equity portfolio against a downturn. Using derivatives is one such…

Q: Whether the following statement is true or wrong. Briefly explain your answer. "It is impossible to…

A: The asset which has no risk associated with it is known as risk free asset. The return from risk…

Q: Which öf the föllowing statements about arbitrage is correct? Select one: O a. A risk averse…

A: Arbitrage is the position when a person buy some product from one market and sold it in another…

Q: According to the Capital Asset Pricing Model, higher investment risk, however it is measured,…

A: The CAPM model is being used for finding the required rates of returns of the security for given…

Q: Volatility is a situation when the prices of financial instruments are potentially stable, and they…

A: Volatility is statistically measurement of movement of stock price.

Q: hedge

A: Introduction: The term hedging refers to a strategy used by the investors in order to protect…

Q: Was the creation of the subprime issue good for the stock market or bad (trick question?)? Good for…

A: The us subprime mortgage crisis was considered as multinational financial crisis that occured…

Q: an investment market, understanding the concept of undervalued and overvalued stocks is very…

A: Undervalued stocks are the stocks whose value are intrinsic value is higher than the market value.…

Q: The CAPM states that expected returns depend on an asset’s loading on market risk.

A: CAPM stands for capital asset pricing model. This model was developed by William. F. Sharpe. As per…

Q: When estimating the cost of equity in the context of the Capital Asset Pricing Model (CAPM), the…

A: The target capital structure is the capital mix that is used by the firm by procuring funds from…

Q: Ceteris paribus, current financial market returns will increase as

A: Capital goods are those fixed assets for the company which help in the production process. They are…

Q: Explain why short-term stock price and market movements appear to be difficult to predict with any…

A: The question is based on the concept of prediction of stock performance in future time. Stock market…

Q: The CAPM implies that investors require a higher return to hold highly volatile securities. Is this…

A: CAPM stands for Capital Asset Pricing Model. Capital Asset Pricing Model is based on the…

Q: Is yield to maturity a valuable factor to take into account? Won't knowing the coupon rate be…

A: Yield to maturity is referred to as the total return that are anticipated on bond when the bond is…

Q: If the efficient market hypothesis is true, what are the implications for the investors?

A: Efficient market hypothesis: Efficient market hypothesis assumes states that stocks are traded at a…

Q: Suppose the financial institution is trying to minimise their exposure to changes in the underlying…

A: We have to find out the reasons why financial institutions go for both delta and gamma hedging. The…

Q: If all investors believe that the market is efficient, could that eventually lead to less efficiency…

A: Market efficiency denotes that at any given point of time, price fully reflect all available…

Q: When you invest your money, you want to avoid risk at all cost. Which type of investment would you…

A: Treasury bills are risk-free securities because they come with a government guarantee and are…

Question

Definition Definition Calculates the present value of a bond's expected future periodic coupon payments. Bond valuation determines the theoretical fair value of a particular bond and helps investors estimate what rate of return they could expect. The bond's theoretical fair value is computed by discounting the future cash flows or coupon payments by an applicable discount rate.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Explanation

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Similar questions

Which of the following statements is correct? A. Investors appreciate illiquid assets in their portfolios as they can easily sell them off to cover margin calls. B. Liquid assets can quickly be converted into cash without changing prices too much. O C. Corporate bonds are among the most liquid financial assets as they trade at a very high frequency. D. Liquid assets tend to be cheaper as investors are not willing to pay for their liquidity benefits.
What are the weaknesses of capital market research?
How can we reduce o reduce the effect of market volatility on our holdings?
A high level of financial leverage exposes firms to default risk. However, as a result of it, shareholders of the firm expect high potential returns. Select one: True False
1. Calculate operating profit margin ratio and net profit margin ratio for the year 2015, 2016 and 2017.
How investors handle risk is an important topic that usually only economists observe.
Increasing leverage lowers the firm’s risk position, yielding the risk-return trade-off. True or False
How can the bursting of an asset-price bubble in thestock market help trigger a financial crisis?
In financial markets, if there is an untapped profit opportunity, arbitrageurs will realize it and it will disappear. What does the EMH hypothesis say about the consequences of these arbitrageurs on prices?
“The Capital Asset Pricing Model [CAPM] assumes that the stock market is dominated by well-diversified investors who are concerned with specific risk. “ is the following statment correct? And explain why.
Do you think investors can earn abnormal returns in financial markets that are at least semi strong-form efficient?
why is knowledge of the money market important for carrying out value maximizing working capital short term management?why are opportunity cost of not taking account the risk return trade off of the various short term instruments?