PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 19, Problem 1PS
WACC True or false? Use of the WACC formula assumes
- a. A project supports a fixed amount of debt over the project’s economic life.
- b. The ratio of the debt supported by a project to project value is constant over the project’s economic life.
- c. The firm rebalances debt each period, keeping the debt-to-value ratio constant.
a)
Expert Solution
Summary Introduction
To discuss: Whether the given statement is true or false.
Explanation of Solution
Given statement:
Project supports a fixed amount of debt over the economic life of a project.
Reason:
It is not true because only the ratio of debt is constant over the economic life of a project and the amount of debt is need not to fixed.
Hence, the given statement is false.
b)
Expert Solution
Summary Introduction
To discuss: Whether the given statement is true or false.
Explanation of Solution
Given statement:
The ratio of debt supported by project to project value is fixed over the economic life of a project.
Reason:
It is true that the ratio of debt supported by project to project value is fixed over the economic life of a project.
Hence, the given statement is true.
c)
Expert Solution
Summary Introduction
To discuss: Whether the given statement is true or false.
Explanation of Solution
Given statement:
The firm will keep the debt to value ratio constant and rebalances its debt each period.
Reasons:
It is true that the firm will keep the debt to value ratio constant and rebalances its debt each period.
Hence, the given statement is true.
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Students have asked these similar questions
which of the following statement is true>?
1. return on equity is the ratio of total assets to total net income
2. one must know the discount rate to compute the npv of a project but one can compute the IRR without referring to the discount rate.
3. there will always be one IRR regardless of cash flows
4. one must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate
5. payback accounts for time value of money
Allied uses debt in its capital structure, so some of the money used to finance the project will be debt. Given this fact, should the projected cash flows be revised to show projected interest charges? Explain
The net present value (NPV) of a project is positive when the discount rate used is:
Group of answer choices
equal to the project's internal rate of return (IRR).
greater than the project's internal rate of return (IRR).
equal to the yield to maturity of the bonds issued to finance the project.
Less than the project's internal rate of return (IRR).
Chapter 19 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - You are considering a five-year lease of office...Ch. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - WACC Whispering Pines Inc. is all-equity-financed....Ch. 19 - WACC Table 19.3 shows a book balance sheet for the...Ch. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - Prob. 8PS
Ch. 19 - WACC Nevada Hydro is 40% debt-financed and has a...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - APV Consider a project lasting one year only. The...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - Prob. 17PSCh. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 20PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 26PSCh. 19 - Prob. 27PS
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