Which of the following statements regarding the capital structure is CORRECT? Group of answer choices: According to the M&M theory under perfect market assumptions, the value of a firm with no debt is the same as that with 100% debt. A firm's optimal capital structure is one that maximizes both its expected EPS and stock price. The pecking order model predicts that the equity financing is more preferred to debt financing. According to the M&M theory, if only corporate taxes are considered, the optimal capital structure is one with 0% debt financing. According to the static tradeoff model, a firm's optimal capital structure can be obtained by considering the debt-related costs only.

Which of the following statements regarding the capital structure is CORRECT? Group of answer choices: According to the M&M theory under perfect market assumptions, the value of a firm with no debt is the same as that with 100% debt. A firm's optimal capital structure is one that maximizes both its expected EPS and stock price. The pecking order model predicts that the equity financing is more preferred to debt financing. According to the M&M theory, if only corporate taxes are considered, the optimal capital structure is one with 0% debt financing. According to the static tradeoff model, a firm's optimal capital structure can be obtained by considering the debt-related costs only.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 6QE

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Which of the following statements are CORRECT? Check all that apply: The aftertax cost of debt decreases when the market price of a bond increases. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. Cost of capital is also known as the minimum expected or required return an investment must offer to be attractive.
Which one of the following statements related to the Security Market Line approach to equity valuation is correct? Assume the firm includes debt in its capital structure. Group of answer choices This model considers a firm's rate of growth. The model will never produce the same cost of equity as the dividend growth model. The model is dependent upon a reliable estimate of the market risk premium. This approach generally produces a cost of equity that equals the firm's overall cost of capital. The model applies only to non-dividend-paying firms.
Select all that are true with respect to discount rates: Group of answer choices The cost of equity rises as you add leverage to the capital structure because the risk to equity rises as you add leverage. In a CAPM world, the Beta of equity rises as you add leverage to the capital structure. The appropriate discount rate for a project should reflect the systematic risk of the expected cash flows of that project. If the firm has positive debt, then the cost of debt is less than the WACC and the WACC is less than the cost of equity. The appropriate discount rate for a project that has the same risk as the overall firm is the firm’s WACC. The appropriate discount rate for a project that has the same risk as the firm’s equity is the firm’s cost of equity.
This question is related to Chapter 18 of Berk & Demarzo "Capital Budgeting and Valuation with Leverage". How do the calculations of the firm value using the APV method differ between the following assumptions? The growth rate of the EBIT and the debt-equity ratio will be constant The growth rate of the EBIT and the interest coverage ratio will be constant. The firm selects the optimal interest coverage ratio and maintains this ratio constant forever (corporate taxes are the only imperfection) Are the values that result different or equal?
Which statement is correct, all else held constant? A. If you have both the dividend growth and the security market line's costs of equity, you should use the higher of the two estimates when computing WACC. B. The aftertax cost of debt increases when the market price of a bond increases. C. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. D. Beta is used to compute the return on equity and the standard deviation is used to compute the return on preferred.
Assume that the risk-free rate increases, but the market risk premium remains constant. What impact would this have on the cost of debt? What impact would it have on the cost of equity? How should the capital structure weights are used to calculate the WACC be determined?
Which of the following statements is true? A. Companies look for investments with payback periods that are larger than their maximum accepted payback period B. An investment with a profatibility index less than 1 is profitable and desirable OC. A projected is accepted if the IRR is less than the cost of capital O D. None of the above are true
Is the debt level that maximizes a firm's expected EPS the same as the one that maximizes its stock price? Explain. Explain how a firm might shift its capital structure so as to change its weighted average cost of capital (WACC). What would be the impact on the value of the firm?
Identify the correct statement: O II EBIT Is expected to be below the indifference point, the firm will prefer the capital structure with more debt O The EBIT-EPS indifference point is the point at which EBIT is the same under two different capital structures O The EBIT-EPS indifference point is always higher for an existing firm compared to a new firm O If EBIT is expected to be above the indifference point the firm will prefer the capital structure with more debt
Consider two firms that are alike in every way except that Firm A has fixed rate debt in its capital structure and Firm B has variable rate debt. Which firm has riskier equity? Why?
Which of the following statements is correct? With all else held constant, a firm will have a higher P/E if its market capitalization rate is higher. P/E will tend to be higher when ROE is higher (assuming plowback is positive). P/E will tend to be higher when the plowback rate is higher.
i. What are the assumptions underlying the CAPM? ii. What is meant by the market portfolio?iii. Sketch the capital market line and the efficient frontier when borrowing and lending rates are equal. Label the axes and important points of your sketch. iv. Do the same for the Security Market Line v. Would you expect firms with high operating leverage to have higher betas?Explain! Step by step correct answer