Homework Answers
If both equity and debt become more riskier due to firm's leverage the firm can increase worth only if the tax rate increases
Increasing tax rate will reduce the cost of capital as interest
payments are tax deductible
Decreasing cost of capital increases the value of the firm.
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When both debt and equity become riskier due to an increase in the firm's leverage, the...
your friend makes the following argument: if there are no transaction costs, taxes or information asymmetry, as we increase the leverage of the firm, the risk of equity will increase. Consequently, stock holders will require a higher rate of return. the f
your friend makes the following argument: if there are no transaction costs, taxes or information asymmetry, as we increase the leverage of the firm, the risk of equity will increase. Consequently, stock holders will require a higher rate of return. the firm's debt will also become riskier and so bondholders will require a higher rate of return. Hence the firm's weighted average cost of capital will increase. is his statement true or false?
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3. Consider a simple firm that has the following market value balance sheet: Liabilities & Equity $1.000 Debt...
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"Increasing financial leverage increases both the cost of debt (rdebt) and the cost of equity (requity)....
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The Miller-Modigliani Arguments Firm U is all-equity financed, while Firm L is both debt- and equity-financed....
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3. Consider a simple firm that has the following market value balance sheet: Liabilities & Equity...
3. Consider a simple firm that has the following market value balance sheet: Liabilities & Equity $1.000 Debt $430 Equity 570 Assets Next year, there are two possible values for its assets, each equally likely: $1,200 and $960. Its debt will be due with 4.8% interest. Because all of the cash flows from the assets must go either to the debt or the equity. If you hold a portfolio of the debt and equity in the same proportions as the...
Consider a simple firm that has the following market-value balance sheet: 3. Assets Liabilities & Equity...
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3. Consider a simple firm that has the following market value balance sheet: Liabilities & Equity $1.000 Debt $430 Equity 570 Assets Next year, there are two possible values for its assets, each equally likely: $1,200 and $960. Its debt will be due with 4.8% interest. Because all of the cash flows from the assets must go either to the debt or the equity. If you hold a portfolio of the debt and equity in the same proportions as the...
"Increasing financial leverage increases both the cost of debt (rdebt) and the cost of equity (requity). So the overall cost of capital cannot stay constant." This problem is designed to show that the speaker is confused. Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost of debt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt and uses the proceeds...
3. Consider a simple firm that has the following market value balance sheet: Liabilities & Equity $1.000 Debt $430 Equity 570 Assets Next year, there are two possible values for its assets, each equally likely: $1,200 and $960. Its debt will be due with 4.8% interest. Because all of the cash flows from the assets must go either to the debt or the equity. If you hold a portfolio of the debt and equity in the same proportions as the...
Consider a simple firm that has the following market-value balance sheet: 3. Assets Liabilities & Equity Debt $1,000 $430 570 Equity Next year, there are two possible values for its assets, each equally likely: $1,200 and $960. Its debt will be due with 4.8% interest. Because all of the cash flows from the assets must go either to the debt or the equity, if you hold a portfolio of the debt and equity in the same proportions as the firm's...
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