Homework Answers
The way a firm is operated or financed changes the firm's beta which is a factor for cost of equity
The way a firm is financed changes the firm's cost of debt
Also because of tax shield advantage resulting from debt the way a
firm is financed changes the firm's cost of capital
Hence, overall the cost of capital of the firm is not independent of how it is operated and financed
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In a world of perfect financial markets (but not necessarily product markets), is the cost of...
In a world of perfect financial markets, is the cost of capital of the firm's financial...
In a world of perfect financial markets, is the cost of capital of the firm's financial claims independent of how it is financed? Q 16.33
A new business wil generate a one-time cash flo of the firm with perfect capital markets?...
A new business wil generate a one-time cash flo of the firm with perfect capital markets? 0 S22 after one year. The business will be financed with 60% equity and 40% t. ms unlever equity cost capital S %, what s el vere value O A. $24,200 B. $19,580 O c. $18,182 O D. $19,820 O E. $20,000
Which of the following is TRUE? I. With perfect capital markets, a firm's WACC is independent...
Which of the following is TRUE? I. With perfect capital markets, a firm's WACC is independent of its capital structure and is equal to its equity cost of capital if the firm is unleveraged. II. Given a 35% corporate tax rate, for every £1 in new permanent debt that the firm issues, the value of the firm increases by £0.35. III. A key assumption of MM's Proposition I without taxes is that individuals can borrow on their own account at...
In their iconic 1958 paper, Miller and Modigliani assume a perfect world and then show that...
In their iconic 1958 paper, Miller and Modigliani assume a perfect world and then show that the way a firm finances its assets (debt, equity, or some combination) is irrelevant. To create this perfect world, they make 4 assumptions: 1) capital markets are perfect; 2) all information is symmetric; 3) investment strategy is not affected by a firm’s cash flows; 4) investor and firms can borrow at the same terms. Which two of these assumptions are important to the theory...
Investment analysis q 3,25 ln a world that is not perfect but risk neutral, assume that...
Investment analysis q 3,25
ln a world that is not perfect but risk neutral, assume that the firm has projects worth $100 in the down-state, $500 in the up-state. The cost of capital for projects is 25%. However, if you could finance it with 50-50 debt, the cash flow rights alone are enough to make the cost of capital a lower 20%. Managers are intransigent and do not want to switch to this new capital structure. You only have $60...
If financial markets were perfect and costless, would there be a need for financial institutions? Explain...
If financial markets were perfect and costless, would there be a need for financial institutions? Explain your answer.
Which choice would complete the following statement: Under perfect capital markets, leverage has ________________ effect on...
Which choice would complete the following statement: Under perfect capital markets, leverage has ________________ effect on firm value or overall cost of capital. Select one: a. No b. Positive c. Negative d. Unpredictable
In a world that is not perfect but risk neutral, assume that the firm has projects...
In a world that is not perfect but risk neutral, assume that the firm has projects worth $100 in the down-state, $500 in the up-state. The cost of capital for projects is 25%. However, if you could finance it with 50-50 debt, the cash flow rights alone are enough to make the cost of capital a lower 20%. Managers are intransigent and do not want to switch to this new capital structure. You only have $60 of capital and cannot...
Select all that is/are true or false about the financial markets. a. Financial markets bring...
Select all that is/are true or false about the financial markets. a. Financial markets bring the buyers and sellers of debt and equity together. b. Stocks trading on an organized exchange such as the NYSE are also referred to as listed securities c. Securities traded between two shareholders happen in the primary market. d. When a firm first sells shares to the public this is a primary market transaction. e. The OTC market has a central location and is...
Banks compete for funds in capital markets, financial markets, and by trying to get deposits from...
Banks compete for funds in capital markets, financial markets, and by trying to get deposits from customers. Which method is lower in cost for the bank? Capital markets Deposits Financial markets They all cost about the same for banks.
In a world of perfect financial markets, is the cost of capital of the firm's financial claims independent of how it is financed? Q 16.33
A new business wil generate a one-time cash flo of the firm with perfect capital markets? 0 S22 after one year. The business will be financed with 60% equity and 40% t. ms unlever equity cost capital S %, what s el vere value O A. $24,200 B. $19,580 O c. $18,182 O D. $19,820 O E. $20,000
Investment analysis q 3,25
ln a world that is not perfect but risk neutral, assume that the firm has projects worth $100 in the down-state, $500 in the up-state. The cost of capital for projects is 25%. However, if you could finance it with 50-50 debt, the cash flow rights alone are enough to make the cost of capital a lower 20%. Managers are intransigent and do not want to switch to this new capital structure. You only have $60...
In a world that is not perfect but risk neutral, assume that the firm has projects worth $100 in the down-state, $500 in the up-state. The cost of capital for projects is 25%. However, if you could finance it with 50-50 debt, the cash flow rights alone are enough to make the cost of capital a lower 20%. Managers are intransigent and do not want to switch to this new capital structure. You only have $60 of capital and cannot...
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