Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 16, Problem 5CQ
Summary Introduction
To determine: The meaning of financial and business risk.
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1. How are the capital market line and security market line similar? How are they different?
2. Explain the difference between financial risk and business risk? What factors influence a firm’s business and financial risk?
Which of these would best improve a firm's liquidity position? *a. Lower profitabilityb. Higher capital spendingc. Higher need for noncash current assets on the balance sheetd. Declaration of stock dividends
The cost of capital can be thought of as the rate of return required by investors in the firm's securities.
O a. false
O b. true
Chapter 16 Solutions
Corporate Finance
Ch. 16 - MM Assumptions List the three assumptions that lie...Ch. 16 - Prob. 2CQCh. 16 - Prob. 3CQCh. 16 - MM Propositions What is the quirk in the tax code...Ch. 16 - Prob. 5CQCh. 16 - Prob. 6CQCh. 16 - Optimal Capital Structure Is there an easily...Ch. 16 - Financial Leverage Why is the use of debt...Ch. 16 - Homemade Leverage What is homemade leverage?Ch. 16 - Capital Structure Goal What is the basic goal of...
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- The higher the _____________, the higher the financial risk, and the higher the ____________. a. Interest rate, business risk b. Financial leverage, operating risk c. Financial leverage, cost of capital d. Fixed operating cost, financial riskarrow_forwardThe cost of equity is ________. a.equal to the amount of asset turnover b.the interest associated with debt c.the weighted average cost of capital d.the rate of return required by investors to incentivize them to invest in a companyarrow_forwardThe cost of equity is ________. Group of answer choices 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 turnoverarrow_forward
- Explain what is meant by the term ‘financial distress’. If we assume that financial distress exists, explain how and why financial distress would cause a firm’s equity to become riskier.arrow_forwardDescribe 1. How the RISK affects EFFICIENCY (operational or financing) that subsequently affects RETURN (for both major shareholders' return and minority shareholders' return) . Notes **It is good to differentiate how the RISK and EFFICIENCY affect major shareholders' return and minority shareholders' return respectively.arrow_forwardWhen a firm has businesses with different risk profiles, different investments can have different costs of equity and capital. What is the relationship between the firm’s cost of equity and capital and its projects’ costs of equity and 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_forwardWhat is the risk-return tradeoff that arises when a firm manages its working capital? Give tangible example/s.arrow_forwardWhat factors contribute to the business risk of a company? What is financial risk? How do the various sources of risk affect the optimal capital structure?arrow_forward
- The risk-return trade-off in managing a firm's working capital involves a trade-off between the amount of debt and equity. True Falsearrow_forwardWhat is meant by the term ‘financial distress’. If we assume that financial distress exists, explain how and why financial distress would cause a firm’s equity to become more risky.arrow_forwardHow does Net Proft Margin, ROA, and ROE determine a firm's financial profitability?arrow_forward
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