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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Problem 2.5 General finance
Debt allows an economy to appear very large but debt also creates more ____ in an economy.
Inevitability
Surety
Certainty
Risk
Business
Interest 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.
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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- 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. Group of answer choices True Falsearrow_forwardWhat is a good capital structure? Are low debt ratios always favorable?arrow_forwardAssume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? Start a New Threadarrow_forward
- The supply and demand for loans will increase when capital becomes more productive. Select one: True Falsearrow_forward4. Other things held constant, the more debt a firm uses, the lower its profit margin will be. * O True O Falsearrow_forwardIf interest rates in the economy are high, then a firm would use a MARR higher than current interest rates, and if interest rates are low, The MARR may be lower TRUE OR FALSE With explanationarrow_forward
- Which 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_forwardLet's talk Beta. What is CORRECT? O Increasing debt financing decreases leverage O Unlevered beta is higher than its levered beta O Financial risk = levered beta minus unlevered beta O Levered beta means financial riskarrow_forwardis it incorrect to use coupon rate of debt towards cost of debt? Briefly explain.arrow_forward
- I. The higher the financial leverage, the higher financial risk and the higher the cost of capital.II. Higher debt ratio, the higher the DFL and Required rate of return. The greater the degree of Financial Leverage, the greater the fluctuations in EPS. A• TF B• FF C• FT D• TTarrow_forward10arrow_forwardBhaarrow_forward
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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY