Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN: 9781337902571
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 14, Problem 5Q
a.
Summary Introduction
To determine: The effect of following changes on the payout ratio.
Introduction:
Payout Ratios:
The payout ratio is that portion of company’s earnings that paid as the dividend to the shareholders of the company. A high ratio means that the company distributed more earnings to the shareholders and low ratio means that the company uses its earnings to reinvest in the company.
b.
Summary Introduction
To determine: The effect of following changes on the payout ratio.
c.
Summary Introduction
To determine: The effect of following changes on the payout ratio.
d.
Summary Introduction
To determine: The effect of following changes on the payout ratio.
e.
Summary Introduction
To determine: The effect of following changes on the payout ratio.
f.
Summary Introduction
To determine: The effect of following changes on the payout ratio.
g.
Summary Introduction
To determine: The effect of following changes on the payout ratio.
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Which of the following is CORRECT?
Select one:
a. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
b. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
c. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of common stock as measured by the CAPM.
d. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.
e. All of the above are correct.
Which of the following is CORRECT?
Select one:
a. If the NPV of a project is negative, the IRR for the project must also be negative.
b. A project's MIRR can never exceed its IRR.
c. If a project with normal cash flows has an IRR less than WACC, the project must have a positive NPV.
d. If Project 1's IRR exceeds Project 2's IRR, then 1 must…
How would each of the following changes tend to affect aggregate (i.e., the average for allcorporations) payout ratios, other things held constant? Explain your answers.a. An increase in the personal income tax rateb. A liberalization of depreciation for federal income tax purposes—that is, faster tax write-offsc. An increase in interest ratesd. An increase in corporate profitse. A decline in investment opportunitiesf. Permission for corporations to deduct dividends for tax purposes as they now deductinterest expenseg. A change in the Tax Code so that realized and unrealized long-term capital gains inany year are taxed at the same rate as ordinary income
How would an increase in corporate taxes tend to affect an average firm’s capitalstructure? What about an increase in the personal tax rate?
Chapter 14 Solutions
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Ch. 14 - Prob. 1QCh. 14 - Prob. 2QCh. 14 - Would it ever be rational for a firm to borrow...Ch. 14 - Modigliani and Miller (MM), on the one hand, and...Ch. 14 - Prob. 5QCh. 14 - One position expressed in the financial literature...Ch. 14 - Prob. 7QCh. 14 - What is the difference between a stock dividend...Ch. 14 - Most firms like to have their stock selling at a...Ch. 14 - Prob. 10Q
Ch. 14 - Prob. 11QCh. 14 - RESIDUAL DIVIDEND MODEL Altamonte...Ch. 14 - Prob. 2PCh. 14 - STOCK REPURCHASES Gamma Industries has net income...Ch. 14 - Prob. 4PCh. 14 - EXTERNAL EQUITY FINANCING Coastal Carolina Heating...Ch. 14 - RESIDUAL DIVIDEND MODEL Walsh Company is...Ch. 14 - DIVIDENDS Brooks Sporting Inc. is prepared to...Ch. 14 - Prob. 8PCh. 14 - ALTERNATIVE DIVIDEND POLICIES In 2018, Keenan...Ch. 14 - Prob. 10SPCh. 14 - Prob. 11ICCh. 14 - Prob. 1TCLCh. 14 - Prob. 2TCLCh. 14 - Prob. 3TCLCh. 14 - Investors are more concerned with future dividends...Ch. 14 - Prob. 5TCL
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- How would each of the following changes tend to affect aggregate payout ratios (that is, the average for all corporations), other things held constant? Explain your answers. a. An increase in the personal income tax rate b. A liberalization of depreciation for federal income tax purposesthat is, faster tax write-offs c. A rise in interest rates d. An increase in corporate profits e. A decline in investment opportunities f. Permission for corporations to deduct dividends for tax purposes as they now do interest charges g. A change in the Tax Code so that both realized and unrealized capital gains in any year were taxed at the same rate as dividendsarrow_forwardWhich of the following will increase the WACC for a tax-paying company? Decrease the proportion of equity financing Decrease the proportion of debt financing Decrease the market value of the equity Increase the market value of the debtarrow_forwardWhich of the following statements is CORRECT? a. WACC calculations should be based on the before-tax costs of all the individual capital components. b. Flotation costs associated with issuing new common stock normally reduce the WACC. c. An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing. d. A change in a company's target capital structure cannot affect its WACC. e. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.arrow_forward
- Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. a) The higher the proportion of equity in a company’s overall capital structure, thehigher return required by its debtholders. (Explain your reasoning – provide a numerical example supporting your answer.) b) In the presence of corporate taxes, a company would prefer to raise debt onlywhen the benefits of the tax shield fully offset the cost of debt. (Explain yourreasoning – provide a numerical example supporting youranswer.) c) In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain yourreasoning –, provide a numerical example supporting youranswer.)arrow_forwardSuppose that a new government is elected and it changes the law applying to firms to:• Allow dividend payments to be tax deductible• Stop interest expense on debt from being tax deductibleHolding other factors constant, and assuming that firms seek to maintain an optimal capital structure in accordance with trade-off theory, what would you expect to happen to the debt ratio of a firm with both equity and debt in its capital structure?a. An increase in the debt ratiob. A decrease in the debt ratioc. The debt ratio would be unchangedd. The debt ratio would doublee. None of the above or it is not possible to sayarrow_forwardIf Congress wants to stimulate the economy, explainhow it might alter each of the following: (a) personaland corporate tax rates, (b) depreciation expenseschedules, and (c) the differential between the taxrate on personal income and long-term capitalgains. How would these changes affect corporateprofitability and free cash flow? How would theyaffect investors’ choices regarding which securities to hold in their portfolios? Might any of theseactions affect the general level of interest rates?arrow_forward
- Two considerations that cause a corporation's cost of capital to be different than its investors' required returns are A. corporate taxes and the earned income tax credit. B. individual taxes and dividends. C. corporate taxes and flotation costs. D. individual taxes and corporate taxes.arrow_forwardWhich one of the following factors might cause a firm to increase the debt in its financial structure?A. An increase in the corporate income tax rate.B. Increased economic uncertainty.C. An increase in the federal funds rate.D. An increase in the price-earnings ratio.arrow_forwardEXERCISE AIndicate whether each of the following statements is true or false. Support your answerswith the relevant explanations.A. In the presence of corporate taxes, a company would prefer to raise debt onlywhen the benefits of the tax shield fully offset the cost of debt. (Explain yourreasoning – in your explanation, provide a numerical example supporting youranswer.)arrow_forward
- How would rising interest rates, that increase the weighted average cost of capital (WACC) impact business valuations? Would this change if the company being valued was going to receive revenue from the government spending?arrow_forwardWhat is one potential impact of tax reforms on small businesses? a) Increased compliance costs b) Decreased access to capital c) Reduced competition d) Expansion of market reacharrow_forwardWhat would be a reason a company would want to understate income? A. to help nudge its stock price higher B. to lower its tax bill C. to show an increase in overall profits D. to increase investor confidencearrow_forward
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