a-j

Cost at t-ORate of Return $10,000 20,000 10,000 20,000 10,000 17.4% 16.0 14.2 13.2 12.0 Which projects should LEI accept? Why? Assume that common stock. LEI does not want to issue any new How would each of the following scenarios affect a firm's cost of debt, ra(1 -T); its cost of 10-1 equity, r,; and its WACC? Indicate with a plus (+), a minus (), or a zero (0) w factor would raise, lower, or have an indeterminate Assume effect on the item in question. for each answer that other things are held constant, even though in some instances this ting in Long-Term Assets: Capital Budgeting would probably not be true. Be prepared to justify your answer but recognize thar of the parts have no single correct answer. These questions are designed to stimulate thought and discussion. Effect on ra(1 - T) WACC The corporate tax rate is lowered. a b. c. The Federal Reserve tightens credit. The firm uses more debt; that is, it increases its debt ratio. d. The dividend payout ratio is increased. e. The firm doubles the amount of capital it raises f. g. during the year The firm expands into a risky new area. The firm merges with another firm whose earnings are countercyclical both to those of the first firm and to the stock market. The stock market falls drastically, and the firm's stock price falls along with the rest. h. 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. ume that the risk-free rate increases, but the market risk premium remains coh What impact would this have on the cost of debt? What imnact wauld it he on risk premium remains constant. Cost at t-ORate of Return $10,000 20,000 10,000 20,000 10,000 17.4% 16.0 14.2 13.2 12.0 Which projects should LEI accept? Why? Assume that common stock. LEI does not want to issue any new How would each of the following scenarios affect a firm's cost of debt, ra(1 -T); its cost of 10-1 equity, r,; and its WACC? Indicate with a plus (+), a minus (), or a zero (0) w factor would raise, lower, or have an indeterminate Assume effect on the item in question. for each answer that other things are held constant, even though in some instances this ting in Long-Term Assets: Capital Budgeting would probably not be true. Be prepared to justify your answer but recognize thar of the parts have no single correct answer. These questions are designed to stimulate thought and discussion. Effect on ra(1 - T) WACC The corporate tax rate is lowered. a b. c. The Federal Reserve tightens credit. The firm uses more debt; that is, it increases its debt ratio. d. The dividend payout ratio is increased. e. The firm doubles the amount of capital it raises f. g. during the year The firm expands into a risky new area. The firm merges with another firm whose earnings are countercyclical both to those of the first firm and to the stock market. The stock market falls drastically, and the firm's stock price falls along with the rest. h. 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. ume that the risk-free rate increases, but the market risk premium remains coh What impact would this have on the cost of debt? What imnact wauld it he on risk premium remains constant