PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 4, Problem 16PS
- a. r = DIV1/P0 + 8
- b. r = EPS1/P0
For each formula, construct a simple numerical example showing that the formula can give wrong answers and explain why the error occurs. Then construct another simple numerical example for which the formula gives the right answer.
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Which of the following is TRUE? I. Internal rate of return (IRR) is a major method for determining the cost
of equity. II. The cost of capital depends on the source of the funds. Group of answer choices I and II II
only Neither I nor II I only
(D/D+E)kd(1-T) + (E/D+E)k2Â is also known asÂ
Group of answer choices
The required rate of equity return
The required rate of debt cost
The weighted average cost of capital
The average cost of equity
The followings are the instructions for this case. Provide the excel file where the computations are done. GIVE ANSWERS PLEASE. I WILL UPVOTE!
You have to use the following equation: WACC = Wd*Rd*(1-t)+We*Re. Where WACC stands for the Weighed average cost of capital, Wd is the weight of debt in the capital could be either market value weight or book value weight and it is calculated in the following way: Wd=D/(E+D), where D is either the book value of debt or the market value of debt, E is the book value of equity or the market value of equity. So keep in mind if you want Wd on book value basis, then both E and D must be on book value basis, if you want Wd on a market value basis, then both E and D must be on market value basis. Rd is the cost of debt (percentage cost of debt), t is the tax rate, We is the weight of equity in the capital could be either market value weight or book value weight, We = E/(E+D), as I explained Wd, it could be either on a book value or book value basis. Re…
Chapter 4 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 4 - Stock markets True or false? a. The bid price is...Ch. 4 - Stock quotes a. I would like to sell 1000 shares...Ch. 4 - Stock quotes Here is a small part of the order...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Valuation by comparables Look up P/E and P/B...Ch. 4 - Dividend discount model True or false? a. All...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...
Ch. 4 - Prob. 11PSCh. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Prob. 13PSCh. 4 - Cost of equity capital Under what conditions does...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Two-stage DCF model Company Z-prime is like Z in...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - Growth opportunities If company Z (see Problem 10)...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 24PSCh. 4 - Prob. 25PSCh. 4 - Prob. 26PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Valuing a business Permian Partners (PP) produces...Ch. 4 - Valuing a business Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing a business Phoenix Corp. faltered in the...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
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- The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because ofa. leverageb. solvencyc. Yieldd. quick assetsarrow_forwardThe followings are the instructions for this case. Provide the excel file where the computations are done. You have to use the following equation: WACC = Wd*Rd*(1-t)+We*Re. Where WACC stands for the Weighed average cost of capital, Wd is the weight of debt in the capital could be either market value weight or book value weight and it is calculated in the following way: Wd=D/(E+D), where D is either the book value of debt or the market value of debt, E is the book value of equity or the market value of equity. So keep in mind if you want Wd on book value basis, then both E and D must be on book value basis, if you want Wd on a market value basis, then both E and D must be on market value basis. Rd is the cost of debt (percentage cost of debt), t is the tax rate, We is the weight of equity in the capital could be either market value weight or book value weight, We = E/(E+D), as I explained Wd, it could be either on a book value or book value basis. Re is the cost of equity. Q1: you have…arrow_forwardBased on the Liquidity ratio, which ratio determine stability, earning power and capital? Explain the formula and its impact & importance. Choose one only.arrow_forward
- Which of the following is NOT a profitability ratio? Select one:a. Return on Equityb. Net Profit Marginc. Return on Assetsd. Average Collection Periodarrow_forward1. Which of the following is referred to as the Accounting Equation? Assets Liabilities + Equity Equity Liabilities + Assets Liabilities Assets + Equity Assets = Liabilities - Equity = 2. Which of the following make up the Finance Equation? (select all that apply) Revenues = Price x Volume Costs = Fixed + Variable Profit Revenues-Costs Income Sales - COGSarrow_forwardQ . Which of the following statements is not true?a) The return on shareholders’ funds can be calculated as profit after tax /total equity x 100b) The dividend cover ratio can be calculated from the Income statement andthe statement of cash flows and the answer will be the samec) The interest cover ratio can be calculated from the income statement andthe statement of cash flows and the answer will be differentd) The operating profit margin is also called the net profit marginarrow_forward
- In question C there is a plot of of cost of debt, cost of equity and cost of capital. Can you show how r_a is calculated to be 0.18667? r_d = Cost of debt r_a = cost of capital r_e = Cost of equityarrow_forwardWhich of the following is an appropriate computation for return on investment? a. Sales divided by total assets b. Net income divided by total assets c. Net income divided by sales d. Sales divided by stockholders' equity  would b be the right answer?arrow_forwardWhich of the following ratios is most useful in evaluating liquidity? ed d out of g ion • A. Return on assets. O B. Debt to equity ratio. C. Return on equity/capital O D. Current ratio.arrow_forward
- Which are valid methods for finding the cost of equity? Check all that apply: 1. The dividend discount model approach 2. The perpetuity approach 3. The YTM approach 4. The CAPM or SML approacharrow_forward1.Which of the following is not something that you would consider when evaluating the optimal capital structure? d. Security Rating. b. EBIT-EPS Analysis. a. Agency Costs. f. Neither the second nor fourth answer is correct. c. Taxes. e. All of the above are considered when determining the optimal capital structure. 2.Which of the following is an argument for the relevance of dividends? b. Reduction of uncertainty. a. Informational content. c. Some investors' preference for current income. d. All of the above. 3.All of the following are true of stock splits EXCEPT: a. Market price per share is reduced after the split. d. Proportional ownership is unchanged. b. The number of outstanding shares is increased. c. Retained earnings are changed.arrow_forwardWhich of the followings is not one of the components of ROE under the Du Pont analysis/identity? Select one:a. Profitabilityb. Efficiencyc. Liquidityd. Equity multiplierarrow_forward
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