In the Merton model of corporate equity which is based on the Black Scholes formula, what is the quantity (S0/KT)? Assume that interest rates are zero (r=0) so the time value of money can be ignored, therefore S0 = ST. (a) Debt-to-equity ratio. (b) Debt-to-assets ratio. (c) Assets-to-debt ratio. (d) Assets-to-equity ratio. (e) Equity-to-assets rati

The cost of equity is _______. 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 turnover

How would each of the following scenarios affect a firm's cost of debt, ra(1-T); its cost of equity, s; and its WACC? Indicate with a plus (+), a minus (-), or a zero (0) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion. Probable Effect on ra(1-T) WACC rs a. The corporate tax rate is lowered. b. The Federal Reserve tightens credit. c. The firm uses me debt; that is, it increases its debt ratio. The dividend payout ratio is increased The firm doubles the amount of capital it raises during the year. е. The firm expands into a risky new area. f. The firm merges with another firm whose earnings g. are countercyclical both to those of the first firm and to…

Which of the following statements is most correct? (Hint: Work Problem 4-16 before answering 4-17, and consider the solution setup for 4-16, as you think about 4-17.) a. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will raise the firm' expected return on common equity (ROE). b. The higher its tax rate, the lower a firm's BEP ratio will be, other things held constant. c. The higher the interest rate on its debt, the lower a firm's BEP ratio will be, other things held constant. d. The higher its debt ratio, the lower a firm's BEP ratio will be, other things held constant. e. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, then adding assets and financing them with debt will decrease the firm's expected return on common equity (ROE).