PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 19, Problem 2PS
WACC The WACC formula seems to imply that debt is “cheaper” than equity—that is, that a firm with more debt could use a lower discount rate. Does this make sense? Explain briefly.
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Debt allows an economy to appear very large but debt also creates more ____ in an economy.
Inevitability
Surety
Certainty
Risk
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Is this statement true or false? Please explain in detail
As debt-financing is usually cheaper than equity financing, debt-financing will lower risk for transnational company.
While the use of debt can lower the average cost of capital, there is a point that the debt leverage gets high enough it increases the cost of capital.
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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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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Suppose interest rates in the economy increase. How would such a change affect the costs of both debt and common equity based on the CAPM?arrow_forwardInterest costs for short-term debt are generally lower than interest costs for long-term debt because A. short-term debt is more flexible, allowing a match of short-term needs with short-term financing. B. the term structure of interest rates generally reflects an upward sloping yield curve. C. investors demand higher returns on short-term debt due to liquidity concerns. D. both A and B.arrow_forward2. The Trade-Off Model A. "The trade-off model of debt financing implies that an increase in the interest rate on debt will cause the level of debt to decline." Do you agree or disagree? Please explain. B. Discuss the likely effects of an increase in uncertainty about cash flows on the responsiveness of a firm's debt level to changes in the interest rate on debt.arrow_forward
- Covered Interest Rate Parity holds much better than Purchasing Power Parity". explaining both theories.arrow_forwardThe key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity. true or false explainarrow_forwardDebt financing is likely to appeal most strongly to organizations that have predictable profits and cash-flow patterns. Question 22 options: True Falsearrow_forward
- 11.Explain why a firm needs to understand their allocation of debtfinancing to equity (the amount the owner used to fund thebusiness). Discuss how this allocation can impact their Total DebtRatio. Can having too much debt bring down profit margins? Why orWhy Not?arrow_forwardThe supply and demand for loans will increase when capital becomes more productive. Select one: True Falsearrow_forwardIs there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not? You need to support your answers with examples.arrow_forward
- Long-term debt financing can have a possibility of more funding but is more risky in terms of long-term payment of loans. Group of answer choices True Falsearrow_forwardUsing CFO Sheila Dowling’s projected weighted-average-cost of capital (WACC) schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate?arrow_forwardWhich statement is most correct? * A. Since debt financing raises the firm’s financial risk, increasing debt ratio will increase WACC. B. Since debt financing is cheaper than equity financing, increasing debt ratio will reduce WACC. C. Increasing a firm’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the firm’s WACC. D. Statements a and c are correct. E. None of the abovearrow_forward
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