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False, when debt levels are too high the cost of equity starts becoming too high which causes WACC to start increasing after certain optimal debt ratio
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Question 12 (3 points) When a firm's capital structure changes to the use of more debt...
Which of the following statements about capital structure and the WACC is CORRECT? A. Since debt...
Which of the following statements about capital structure and the WACC is CORRECT? A. Since debt financing is cheaper than equity financing, raising a company’s debt ratio will always reduce its WACC. B. Increasing a company’s debt ratio will typically reduce the marginal cost of both debt and equity financing. However, this action still may raise the company’s WACC. C. Since debt financing raises the firm's financial risk, increasing a company’s debt ratio will always increase its WACC. D. Increasing...
Which of the following statements is CORRECT? Since debt financing is cheaper than equity financing, raising...
Which of the following statements is CORRECT? Since debt financing is cheaper than equity financing, raising a company's debt ratio will always reduce its WACC Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing; however, this action still may raise the company's WACC Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing; however, this action still may lower the company's WACC Since a firm's...
1. The after-tax cost of debt is higher than the before-tax cost of debt. True or...
1. The after-tax cost of debt is higher than the before-tax cost of debt. True or False 2. The constant dividend growth model and CAPM are two ways of estimating a firm's cost of equity. True or False 3. The cost of capital uses the amounts of total assets and debt as the capital structure weights. True or False 4. In deriving the WACC, market values are preferred over book values for the capital structure weights. True or False 5....
Globex Corp. has a capital structure that consists of 40% debt and 60% equity. The firm's...
Globex Corp. has a capital structure that consists of 40% debt and 60% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp.'s market risk without the effect of leverage. If Globex Corp. has a 40% tax rate, what is its unlevered beta? 0.91 0.75 0.79 0.71 Now consider the case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%,...
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a...
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock and common equity capital) and is often presented as a percentage of the type of financing used As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure Which of the following statements regarding a firm's optimal capital...
A firm uses only debt and equity in its capital structure. The firm's weight of debt...
A firm uses only debt and equity in its capital structure. The firm's weight of debt is 75 percent. The firm could issue new bonds at a yield to maturity of 12 percent and the firm has a tax rate of 30 percent. If the firm's WACC is 13 percent, what is the firm's cost of equity? 38.29 percent 36.00 percent 26.80 percent 4.00 percent
Weekend Warriors, Inc., has 30% debt and 70% equity in its capital structure. The firm's estimated...
Weekend Warriors, Inc., has 30% debt and 70% equity in its capital structure. The firm's estimated after-tax cost of debt is 9% and its estimated cost of equity is 12%. Determine the firm's weighted average cost of capital ( WACC). Weekend Warriors' weighted average cost of capital (WACC) is %. (Round to two decimal places.)
Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred...
Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the...
Globex Corp. has a capital structure that consists of 35% debt and 65% equity. The firm's...
Globex Corp. has a capital structure that consists of 35% debt and 65% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp's market risk without the effect of leverage. If Globex Corp. has a 45% tax rate, what is its unlevered beta? 0.68 0.77 0.85 0.98 Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before tax cost of debt is...
Question 2 5 pts Our firm's capital structure based on market values is 30% debt and...
Question 2 5 pts Our firm's capital structure based on market values is 30% debt and 70% equity. The firm's before tax cost of debt is 5%, its cost of equity is 10%, and its tax rate is 40%. Currently, the target value weight of debt is 40% and the target value weight of equity is 60%. What would be the firm's weighted average cost of capital (WACC) based on this information? 7.20% 8.75% 8.25% 7.90% 8.50%
Globex Corp. has a capital structure that consists of 40% debt and 60% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp.'s market risk without the effect of leverage. If Globex Corp. has a 40% tax rate, what is its unlevered beta? 0.91 0.75 0.79 0.71 Now consider the case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%,...
Why focus on the optimal capital structure? A company's capital structure decisions address the ways a firm's assets are financed (using debt, preferred stock and common equity capital) and is often presented as a percentage of the type of financing used As with all financial decisions, the firm should try to set a capital structure that maximizes the stock price, or shareholder value. This is called the optimal capital structure Which of the following statements regarding a firm's optimal capital...
Weekend Warriors, Inc., has 30% debt and 70% equity in its capital structure. The firm's estimated after-tax cost of debt is 9% and its estimated cost of equity is 12%. Determine the firm's weighted average cost of capital ( WACC). Weekend Warriors' weighted average cost of capital (WACC) is %. (Round to two decimal places.)
Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the...
Globex Corp. has a capital structure that consists of 35% debt and 65% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp's market risk without the effect of leverage. If Globex Corp. has a 45% tax rate, what is its unlevered beta? 0.68 0.77 0.85 0.98 Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before tax cost of debt is...
Question 2 5 pts Our firm's capital structure based on market values is 30% debt and 70% equity. The firm's before tax cost of debt is 5%, its cost of equity is 10%, and its tax rate is 40%. Currently, the target value weight of debt is 40% and the target value weight of equity is 60%. What would be the firm's weighted average cost of capital (WACC) based on this information? 7.20% 8.75% 8.25% 7.90% 8.50%
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