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Leverage and cost of capital: *** Each of the following statements is false or at least...
Which of the following statements is FALSE? O A. The opportunity cost of capital is the...
Which of the following statements is FALSE? O A. The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. O B. Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk C. For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities wiith a similar term OD. The opportunity cost of...
Which of the following statements is false in a Modigliani-Miller world? A. Capital structure does not...
Which of the following statements is false in a Modigliani-Miller world? A. Capital structure does not affect the cost of capital B. Higher leverage increase the cost of equity C. Higher leverage does not affect the WACC D. Higher leverage does not affect the cost of equity Which of the following is not an advantage of having large shareholders? A. Better coordination in monitoring management B. Executives more likely to be dismissed when underperforming C. Less shareholders' interference in the...
Companies that use debt in their capital structure are said to be using financial leverage. Using...
Companies that use debt in their capital structure are said to be using financial leverage. Using leverage can increase shareholder returns, but leverage also increases the risk that shareholders bear. Consider the following case: Western Gas & Electric Co. is a small company and is considering a project that will require $500,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this...
Companies that use debt in their capital structure are said to be using financial leverage. Using...
Companies that use debt in their capital structure are said to be using financial leverage. Using leverage can increase shareholder returns, but leverage also increases the risk that shareholders bear. Consider the following case: Water and Power Co. is a small company and is considering a project that will require $650,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 25%. What will be the ROE (return on equity) for this project...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $4 million of EBIT, and is in the 40% federal plus state tax bracket. Firm HL, however, has a debt to capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 30% debt to capital ratio and pays only 10% interest on its debt....
Which of the following statements correctly relate to M&M Proposition I (firm capital structure and firm...
Which of the following statements correctly relate to M&M Proposition I (firm capital structure and firm value), with taxes? a)Firm value increase with firm leverage when debt ratio is low, and then decrease with firm leverage when debt ratio is too high b)The value of a firm unlevered is greater than the value levered c)There could be an arbitrage opportunity when two firms that are virtually identical except for their capital structure are selling in the market at different values....
FINANCIAL LEVERAGE EFFECTS Firms and LL are identical except for their financial leverage ratios and the...
FINANCIAL LEVERAGE EFFECTS Firms and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $27 million in invested capital has $5.4 million of EBIT, and is in the 40% federalplus-state tax bracket. Tim He, however, has a debt-to-capital ratio of 60% and pays 11% interest on its debt, whereas L has a 30% debt-to-capital ratio and pays only 8% interest on its debt. Neither form u s preferred stock in...
Break-Even EBIT and Leverage Coldstream Corp. is comparing two different capital structures. Plan I would result...
Break-Even EBIT and Leverage Coldstream Corp. is comparing two different capital structures. Plan I would result in 3,700 shares of stock and $13,700 in debt. Plan II would result in 3,100 shares of stock and $30,140 in debt. The interest rate on the debt is 7 percent. a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $7,600. The all-equity plan would result in 4,200 shares of stock outstanding. Which of the three...
INANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and...
INANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $4 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 11% interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $11 million in invested capital, has $2.2 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 11% interest on its debt, whereas LL has a 35% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in...
Which of the following statements is FALSE? O A. The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. O B. Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk C. For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities wiith a similar term OD. The opportunity cost of...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $4 million of EBIT, and is in the 40% federal plus state tax bracket. Firm HL, however, has a debt to capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 30% debt to capital ratio and pays only 10% interest on its debt....
FINANCIAL LEVERAGE EFFECTS Firms and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $27 million in invested capital has $5.4 million of EBIT, and is in the 40% federalplus-state tax bracket. Tim He, however, has a debt-to-capital ratio of 60% and pays 11% interest on its debt, whereas L has a 30% debt-to-capital ratio and pays only 8% interest on its debt. Neither form u s preferred stock in...
Break-Even EBIT and Leverage Coldstream Corp. is comparing two different capital structures. Plan I would result in 3,700 shares of stock and $13,700 in debt. Plan II would result in 3,100 shares of stock and $30,140 in debt. The interest rate on the debt is 7 percent. a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $7,600. The all-equity plan would result in 4,200 shares of stock outstanding. Which of the three...
FINANCIAL LEVERAGE EFFECTS Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $11 million in invested capital, has $2.2 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 11% interest on its debt, whereas LL has a 35% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in...
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