How would each of the following scenarios affect a firm?s cost of debt, rd(1 ? T); its
Question:
How would each of the following scenarios affect a firm?s cost of debt, rd(1 ? T); its cost of equity, rs; and its WACC? Indicate with a plus (+), a minus (?), or a zero (0) if the factor would raise, would lower, or would have an indeterminate effect on the item in question. Assume for each answer that other things are held constant even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion.
Transcribed Image Text:
EFFECT ON r,(1 - T) WACC r. a. The corporate tax rate is lowered. b. The Federal Reserve tightens credit. c. The firm uses more debt; that is, it increases its debt/assets ratio. d. The dividend payout ratio is increased. e. The firm doubles the amount of capital it raises during the year. f. The firm expands into a risky new area g. The firm merges with another firm whose earnings are countercyclical both to those of the first firm and to the stock market. h. The stock market falls drastically, and the firm's stock price falls along with the rest of the stocks. i. Investors become more risk-averse. j. The firm is an electric utility with a large investment in nuclear plants. Several states are considering a ban on nuclear power generation.
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Answer rating: 60% (10 reviews)
Probable Effect on r d 1 T r s WACC a The corporate tax rate is lowered 0 b Th...View the full answer
Answered By
Akshay Singla
as a qualified engineering expert i am able to offer you my extensive knowledge with real solutions in regards to planning and practices in this field. i am able to assist you from the beginning of your projects, quizzes, exams, reports, etc. i provide detailed and accurate solutions.
i have solved many difficult problems and their results are extremely good and satisfactory.
i am an expert who can provide assistance in task of all topics from basic level to advance research level. i am working as a part time lecturer at university level in renowned institute. i usually design the coursework in my specified topics. i have an experience of more than 5 years in research.
i have been awarded with the state awards in doing research in the fields of science and technology.
recently i have built the prototype of a plane which is carefully made after analyzing all the laws and principles involved in flying and its function.
1. bachelor of technology in mechanical engineering from indian institute of technology (iit)
2. award of excellence in completing course in autocad, engineering drawing, report writing, etc
4.70+
48+ Reviews
56+ Question Solved
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston
Question Posted:
Students also viewed these Corporate Finance questions
-
How would each of the following affect Helena Hand basket's supply of labour? a. The value of Helena's home triples in an unexpectedly hot real estate market. b. Originally an unskilled worker,...
-
How would each of the following affect national saving, investment, the current account balance, and the real interest rate in a large open economy? a. An increase in the domestic willingness to save...
-
How would each of the following events change measured GDP? a. There is an increase in illegal drug sales. b. More women stop being full-time homemakers and enter the labor force. c. An oil spill...
-
I need help with the 10-column worksheet. When I do the balance sheet the difference of my balance numbers do not equal my net income when it should. My net income is correct since the books states...
-
How would your answer in question 13 changes if the current long-term government bond yield was 3 percent and Fastest Company's beta was 1.5? In question 13 suppose the current long-term government...
-
Identify three specific actions an organization can take to overcome consumers lack of trust.
-
Depreciation as a Tax Shield The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Rummy Company is considering the purchase of...
-
Using the data in problem 7.5, determine the best process for each of the following volumes: (1) 75,000, (2) 275,000, and (3) 375,000. In problem 7.5, Meile Machine Shop, Inc., has a 1-year contract...
-
How would a manager use economic theory to maximize profit price for a service or product?
-
Martin Company had the following transactions during its first month of operations: Junel The company received cash of 35,000 and issued common stock to the shareholders. 2 Borrowed 20,000 from the...
-
Suppose Bon Temps embarked on an aggressive expansion that requires additional capital. Management decided to finance the expansion by borrowing $40 million and by halting dividend payments to...
-
Assume that the risk-free rate increases. What impact would this have on the cost of debt?
-
The numbers of cremations in the United States are shown in Table 18 for various years. Let p be the percentage of bodies that are cremated in the year that is t years since 1990. a. Construct a...
-
Choose and identify one type of behavioral bias briefly explain why the selected incidence demonstrates behavioral bias. propose a plan to deal with the bias when you doing a client's profile as a...
-
Calculate the cost to build one unit of Assembly Z using the table below. Only the cells in yellow will have costs. Component/Processing Costs Assembly Z Qty Per Cost Material Setup Labor Overhead...
-
A stock has a beta of 1.2, the riskless rate is 0.04 and the market premium is 0.1. The stock will return a constant $2 as dividend in perpetuity. What is the price of the stock? Note: Like the...
-
What is Accounting Equation and explain why the accounting equation will always work? Also, provide an example with your explanation.
-
1. Discuss the results of your Strengthsfinder Test and the Universum Survey Test. 2. Based on those results along with what you have learned from attending outside events and in class, discuss which...
-
Speedy Running Shoes reports the following: Requirement 1. Journalize all entries required for Speedy Running Shoes. 2011 Jan 3 Oct 1 Dec 31 Recorded Estate bankcard sales of $104,000, less a 2%...
-
After graduating from college and working a few years at a small technology firm. Preet scored a high-level job in the logistics department at Amex Corporation. Amex sells high-quality electronic...
-
Identify the chiral carbon atoms, if any, in the following compounds. (a) OH () Cl @
-
a. What effect would each of the following events likely have on the level of nominal interest rates? (1) Households dramatically increase their savings rate. (2) Corporations increase their demand...
-
What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy?
-
What is the real risk-free rate of interest (r*) and the nominal risk-free rate (rRF)? How are these two rates measured?
-
The balance sheet of ABC Ltd. on December 31, 2023, is provided below: Item Amount ($) Accounts Payable 1,650,000 Notes Payable 1,630,000 Accrued Expenses 1,510,000 Total Current Liabilities ?...
-
Budgeting at Apple Inc. Values: Projected Sales Revenue: $10,000,000 Budgeted Expenses: $6,000,000 Budget Period: Quarterly Requirements: Create a quarterly budget for Apple based on the given...
-
Cost Allocation at Google Google needs to allocate overhead costs. Values: Item Amount Total Overhead $6,000,000 Machine Hours 110,000 Labor Hours 95,000 Requirements: Allocate the overhead costs...
Study smarter with the SolutionInn App