Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 16, Problem 22QP
Stockholder Risk [LO1] Suppose a firm’s business operations are such that they mirror movements in the economy as a whole very closely; that is, the firm’s asset beta is 1.0. Use the result of Problem 21 to find the equity beta for this firm for debt–equity ratios of 0,1, 5, and 20. What does this tell you about the relationship between capital structure and shareholder risk? How is the shareholders’ required
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How can you estimate the business risk of a firm?
O Estimate its levered beta
O Unlever its beta using its target debt/equity ratio
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26. A ________ is the risk of the market not being able to be eliminated through portfolio diversification and that the share price will be a function of the stock market.
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Chapter 16 Solutions
Fundamentals of Corporate Finance
Ch. 16.1 - Why should financial managers choose the capital...Ch. 16.1 - What is the relationship between the WACC and the...Ch. 16.1 - What is an optimal capital structure?Ch. 16.2 - Prob. 16.2ACQCh. 16.2 - Prob. 16.2BCQCh. 16.2 - Prob. 16.2CCQCh. 16.3 - What does MM Proposition I state?Ch. 16.3 - What are the three determinants of a firms cost of...Ch. 16.3 - Prob. 16.3CCQCh. 16.4 - What is the relationship between the value of an...
Ch. 16.4 - If we consider only the effect of taxes, what is...Ch. 16.5 - Prob. 16.5ACQCh. 16.5 - What are indirect bankruptcy costs?Ch. 16.6 - Can you describe the trade-off that defines the...Ch. 16.6 - What are the important factors in making capital...Ch. 16.7 - Prob. 16.7ACQCh. 16.7 - What is the difference between a marketed claim...Ch. 16.7 - What does the extended pie model say about the...Ch. 16.8 - Prob. 16.8ACQCh. 16.8 - Why might firms prefer not to issue new equity?Ch. 16.8 - Prob. 16.8CCQCh. 16.9 - Do U.S. corporations rely heavily on debt...Ch. 16.9 - What regularities do we observe in capital...Ch. 16.10 - Prob. 16.10ACQCh. 16.10 - Prob. 16.10BCQCh. 16 - Maximizing what will maximize shareholder value?Ch. 16 - What is most closely related to a firms use of...Ch. 16 - Give an example of a direct cost of bankruptcy.Ch. 16 - Prob. 16.7CTFCh. 16 - Prob. 1CRCTCh. 16 - Prob. 2CRCTCh. 16 - Optimal Capital Structure [LO1] Is there an easily...Ch. 16 - Observed Capital Structures [LO1] Refer to the...Ch. 16 - Financial Leverage [LO1] Why is the use of debt...Ch. 16 - Homemade Leverage [LO1] What is homemade leverage?Ch. 16 - Prob. 7CRCTCh. 16 - Prob. 8CRCTCh. 16 - Prob. 9CRCTCh. 16 - Prob. 10CRCTCh. 16 - Prob. 1QPCh. 16 - Prob. 2QPCh. 16 - Prob. 3QPCh. 16 - Prob. 4QPCh. 16 - MM and Stock Value [LO1] In Problem 4, use MM...Ch. 16 - Prob. 6QPCh. 16 - Prob. 7QPCh. 16 - Prob. 8QPCh. 16 - Homemade Leverage and WACC [LO1] ABC Co. and XYZ...Ch. 16 - Prob. 10QPCh. 16 - MM and Taxes [LO2] In the previous question,...Ch. 16 - Calculating WACC [LO1] Twice Shy Industries has a...Ch. 16 - Calculating WACC [LO1] Braxton Corp. has no debt...Ch. 16 - MM and Taxes [LO2] Meyer Co. expects its EBIT to...Ch. 16 - Prob. 15QPCh. 16 - MM [LO2] Tool Manufacturing has an expected EBIT...Ch. 16 - Prob. 17QPCh. 16 - Homemade Leverage [LO1] The Day Company and the...Ch. 16 - Weighted Average Cost of Capital [LO1] In a world...Ch. 16 - Cost of Equity and Leverage [LO1] Assuming a world...Ch. 16 - Business and Financial Risk [LO1] Assume a firms...Ch. 16 - Stockholder Risk [LO1] Suppose a firms business...Ch. 16 - Prob. 1MCh. 16 - Prob. 2MCh. 16 - Prob. 3MCh. 16 - Stephenson Real Estate Recapitalization Stephenson...Ch. 16 - Stephenson Real Estate Recapitalization Stephenson...
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- What is the value of Ls stock for volatilities between 0.20 and 0.95? What incentives might the manager of L have if she understands this relationship? What might debtholders do in response?arrow_forwardTo maximise the wealth of shareholders, a finance manager should _________ Question 20 options: 1) increase the current ratio of the firm 2) decrease the debt ratio of the firm 3) increase the cost of goods sold of the firm 4) increase the share price of the firmarrow_forwardIdentify and analyze the factors that can affect the reliability of a firm’s beta. Do you think the recent global financial crisis has had an impact on a firm’s beta, its cost of equity and its cost of capital? What are the likely implications, for both the firm and its providers of capital?arrow_forward
- Which of the following does NOT directly affect a company's cost of equity? Select one: a. Return on assets b. Expected market return c. Risk-free rate of return d. The company's betaarrow_forwardCheck all the factors that would be associated with an increase in a firm's price-to-earnings ratio. All the correct factors must be checked to receive credit for getting this question correct . a Increase in the beta of a firm's stock b Decrease in the beta of a firm's stock c Increase in the risk-free rate d Decrease in the risk-free rate e Increase in a firm's growth rate of cash flow f Decrease in a firm's growth rate of cash flow g Increase in the market risk premium h Decrease in the market risk premiumarrow_forwardWhich one of the followings is incorrect regarding to cost of equity: On average, it is higher than cost of debt. It moves in the same direction with tax rates. It is affected by return on market portfolio. For a dividend paying company, it is sensitive to growth expectations for future dividends. It is highly dependent on risk level of the firm and growth rate. For calculating cost of equity, we can rely on dividend growth model or SML approach. Both models might suffer from the assumption that past is a good predictor of future. True False Percy's Wholesale Supply has earnings before interest and taxes of €106,000. Both the book and the market value of debt is €170,000. The unlevered cost of equity is 15.5 per cent while the pre-tax cost of debt is 8.6 per cent. The tax rate is 28 per cent. What is the firm's weighted average cost of capital? Show your steps.arrow_forward
- Ratio analysis is an important tool used by financial analysts in determining the future value of a company's stock. 1. Explain which ratios you think are most useful in determining the future viqbility kf a company. 2 What are the importance of benchmarks and red flags that are obvious indicators of future problems?arrow_forwardDoes decreasing net margin percentages and slightly increasing financial leverage have an effect on Return on Equity (ROE)?. If Yes, What should a company do to solve such problem.arrow_forwardAnswer quickly please The _________ is the internal rate of return a firm must earn on its investment in order to maintain the market value of its stock. a. IRR b. net profit margin c. Cost of Capital d. gross profit marginarrow_forward
- a. What is the meant beta (β)? How would you interpret if β=1, β>1 and β<1? b. Differentiate between systematic and unsystematic risks. c. What is equity capital? Write two advantages and two disadvantages to the firm of raising capital this way. d) What is meant by capital structure and how is it different from financial structure?arrow_forwardWhich of the following statements is FALSE? Question content area bottom Part 1 A. Growth rate of the firm is higher, it is more optimal to have a higher level of debt relative to equity in the firm capital structure. B. Growth will affect the optimal leverage ratio even if the firm has positive earnings. C. When examining tax, the optimal debt level is proportional to its current earnings. D. The more unsure we are of EBIT the more chance that interest will exceed EBIT, if the interest expense is higharrow_forwardContinuing with Beta (B) talk. What is TRUE? When Beta of a firm increases, its cost of capital may increase When the risk of a company increases, its beta may decrease O Beta of a firm stays the same over the life of the firm Firms in the high growth areas (e.g., technology) have lower betasarrow_forward
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