PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 18, Problem 21PS
Pecking-order theory* Fill in the blanks: According to the pecking-order theory,
- a. The firm’s debt ratio is determined by_____.
- b. Debt ratios depend on past profitability, because _____.
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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
____ indicate the ability of the firm to meet its short-term financial obligations.
a.
Profitability ratios
b.
Liquidity ratios
c.
Leverage ratios
d.
Activity ratios
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 company
Chapter 18 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Here are book and market value balance...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Prob. 5PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Prob. 7PSCh. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Bankruptcy costs On February 29, 2019, when PDQ...Ch. 18 - Financial distress This question tests your...
Ch. 18 - Prob. 12PSCh. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 20PSCh. 18 - Pecking-order theory Fill in the blanks: According...Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Financial slack True or false? a. Financial slack...Ch. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 26PSCh. 18 - Trade-off theory The trade-off theory relies on...
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- Current Ratio. What effect would the following actions have on a firm's current ratio? Assume that net working capital is positive. a. Inventory is purchased. b. A supplier is paid. c. A short-term bank loan is repaid. d. A long-term debt is paid off early. e. A customer pays off a credit account. f. Inventory is sold at cost. g. Inventory is sold for a profit. LO 3.2arrow_forwardThe 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 turnoverarrow_forward1. Which of the following pairs of financial statement analysis tool will be given more emphasis by a firm that is considering whether to grant trade credit or sell on account to a new client? Choices: Current and cash ratio Return on sales and return on asset Debt and debt-to-equity ratio Book value and price-to-earnings ratio 2. It is assumed that the Cost of equity and rate of return are both constant under Walter's Model of Dividend Relevance, if the cost of equity is higher than the rate of return, it is optimal that Choices: No dividend to be given to shareholders None of the choices is correct. The firm is indifferent as to distribute dividends or to reinvest the income All the earnings for the period shall be distributed to shareholders 3. Which of the following is correct with regards to cash discounts offering? Choices: These are granted because customer acquires high quantity of products and goods It is used lengthen the cash conversion cycle without putting pressure…arrow_forward
- 3 Assessing a firm's overall solvency is best accomplished by evaluating current ratio debt to assets ratio. price-earnings ratio return on assets. gross margin.arrow_forwardWhich one of the following is minimized when the value of the firm is maximized? A- WACC B- Return on equity C-Debt D-Taxes E- Bankruptcy costsarrow_forwardLeverage is a. The ability to earn a satisfactory return on the investments in the business. b. The ability to pay current debts when they come due. c. The proportion of debt to stockholders' equity. d. Also called profit margin.arrow_forward
- Indicate 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_forwardIf your goal is to determine how effective a firm in managing its assets, you would examine O Profit margin, Current ratio, Debt ratio O Price-earnings ratio, Times-interest-earned ratio, Operating Margin O Inventory turnover, Receivables turnover, Assets turnover O Quick ratio, Debt ratio, Times-interest-earned ratioarrow_forwardIncome taxes have the effect of A. increasing the cost of debt for a firm. B. decreasing the cost of debt for a firm. C. decreasing the cost of equity for a firm. D. Both B and C are correct.arrow_forward
- The required return on assets will change, if O a. one of the firm's business lines is closed. O b. leverage increases. O C. if the credit rating companies downgrade the firm's corporate debt. O d. if the interest payment to creditors increases.arrow_forwardWhat do the liquldity ratlos tell you In the financlal analysis? 1 The capital structure of a company 2 The profitability of the company 3. The efficiency of inventory 4. The company's ability to pay off debt obligations 5. Ratios analysisarrow_forwardWhen we compute the EV/EBITDA multiple, i.e. the ratio of Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization, we estimate the enterprise value of a firm by adding the values of debt and equity and netting out cash. Could you provide a reason for netting out cash? O a. Cash can be used to pay down debt. O b. Cash is easy to value. O c. None of the given answers is correct. The income from cash is not part of EBITDA. Cash is liquid. O d. O e.arrow_forward
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