Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 17, Problem 7CQ
Observed Capital Structures Refer to the observed capital structures given in Table 17.3 of the text. What do you notice about the types of industries with respect to their average debt-equity ratios? Are certain types of industries more likely to be highly leveraged than others? What are some possible reasons for this observed segmentation? Do the operating results and tax history of the firms play a role? How about their future earnings prospects? Explain.
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Students have asked these similar questions
The financial ratios which address the question: Has the firm earned adequate returns on its investments?
O Efficiency ratios
O Liquidity ratios
O Profitability ratios
O Working Capital ratios.
Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity?
The 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 turnover
Chapter 17 Solutions
Corporate Finance
Ch. 17 - Bankruptcy Costs What are the direct and indirect...Ch. 17 - Stockholder Incentives Do you agree or disagree...Ch. 17 - Capital Structure Decisions Due to large losses...Ch. 17 - Cost of Debt What steps can stockholders take to...Ch. 17 - MM and Bankruptcy Costs How does the existence of...Ch. 17 - Agency Costs of Equity What are the sources of...Ch. 17 - Observed Capital Structures Refer to the observed...Ch. 17 - Bankruptcy and Corporate Ethics As mentioned in...Ch. 17 - Bankruptcy and Corporate Ethics Finns sometimes...Ch. 17 - Prob. 10CQ
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- The 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_forwardHow WACC is related to the level of leverage (debt/equity ratio) of a firm. What are the key differences between the main capital structure theories?arrow_forwardProfitability index: What is the profitability index, and why is it helpful in the capital rationing process?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_forwardc. Define the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant? Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate, the amount of accounts payable, the profit margin, and the payout ratio.arrow_forwardWhat rate do investors use to discount the capital gains and cash flows of firms?arrow_forward
- Which company is more reliant on equity to fund their assets based on the ratios you have? What are some of the consequences should it anticipate if it relies heavily on equity? Explain using supporting ratios and scenarios.arrow_forwardWhy are capital market data and information useful when a firm is considering its cost of capital?arrow_forwardIndicate whether the following statement is true or false. Provide the relevant explanations. The higher the proportion of equity in a company’s overall capital structure, the higher return required by its debtholders. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)arrow_forward
- What are we referring to when we discuss the “optimal capital structure” of a business? Why is the optimal capital structure also referred to as the “target capital structure”?arrow_forward1. From the scenario, Identify what is the Market value of the firm's equity, the market value of the firm's debt, the cost of equity (required rate of return), cost of debt (yield to maturity on existing debt) and the corporate tax rate.arrow_forwarda) Define financial leverage.b) What is the effect on earnings?c) When is the use of financial leverage advantageous and disadvantageous?arrow_forward
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