FINE 2000 Chapter Notes - Chapter 13: Weighted Arithmetic Mean, Capital Structure, Preferred Stock

20 views3 pages

sapphiresea-lion342

14 Jun 2016

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Ch 13 wacc & company valuation: capital structure - the firm"s mix of long-term financing [debt and equity, cost of capital - the return investors expect to earn if they invested in securities with comparable risk. Wacc is the weighted average of the returns on debt and equity, with weights depending on the relative market values of the two securities. Calculating market values: mv of bonds = pv of all coupons & par value discounted at the current interest rate, mv of equity = market price/share multiplied by the number of shares outstanding. Typically, yield to maturity is used as the expected return. *beware: for a firm in financial difficulty, yield on bonds may expected return. Capm: expected return = risk-free rate + beta(risk premium) Ddm: expected return = dividend yield + growth. A preferred stock pays a fixed annual dividend in perpetuity, thus:

Related Questions

F2 Q4-5

In a world with taxes and bankruptcy costs, and in which interest on debt is tax deductible, if a firm has some debt:

a. The return on equity is less than the weighted average cost of capital (WACC).

b. The return on equity is greater than the weighted average cost of capital (WACC).

c. The relationship between return on equity and the WACC cannot be determined because it depends on several factors.

In the real world, where there are taxes and interest on debt is tax deductible, if two firms have the same cash flows as each other in all possible scenarios in the future, the returns on equity of the two firms will:

a. Will depend on the capital structures adopted by the firms.

b. Will depend on the capital structures adopted by the firms and the valuation method used.

c. Always be equal to each other.

d. Will depend on the method of valuation used.

F2 Q1-5

The return on equity of a typical firm may change over time because of changes in business and economic conditions, but it is unlikely to change based on the financing or capital structure of the firm.

a. False.

b. True.

Your firm has been plodding along without much attention from the stock market. Your boss insists that he can (a) increase the return on assets to shareholders by taking on more debt, and (b) attract new investors to the firm due to the higher returns.

a. False.

b. Partly true, partly false.

c. True.

Even in a world with no frictions â that is, taxes, costs of bankruptcy, asymmetric information â debt will always be preferred because cost of debt is always lower than cost of equity for a firm.

a. True.

b. False.

c. Partly true, partly false.

In a world with taxes and bankruptcy costs, and in which interest on debt is tax deductible, if a firm has some debt:

a. The return on equity is less than the weighted average cost of capital (WACC).

b. The return on equity is greater than the weighted average cost of capital (WACC).

c. The relationship between return on equity and the WACC cannot be determined because it depends on several factors.

a. Will depend on the capital structures adopted by the firms.

b. Will depend on the capital structures adopted by the firms and the valuation method used.

c. Always be equal to each other.

d. Will depend on the method of valuation used.

V2 F1 Q1-5

Please give explanations

1) The return on assets of a typical firm may change over time because of changes in business and economic conditions, but it is unlikely to change based on the financing or capital structure of the firm with reasonable amounts of debt.

a) True

b) False

2) Your firm has been plodding along without much attention from the stock market. Your boss insists that he can (a) increase the return on equity to shareholders by taking on more debt, and (b) attract new investors to the firm due to the higher returns.

a) False

b) Partly true, partly false

c) True

Q3) In a world with no frictions â that is, taxes, costs of bankruptcy, asymmetric information - there is no optimal capital structure (that, is no optimal mix of debt and equity).

a) True

b) False

Q4) In a world with taxes and bankruptcy costs, and in which interest on debt is tax deductible, if a firm has some debt:

a) The relationship between return on assets and the WACC is indeterminate and depends on several factors.

b) Its return on assets is always greater than the weighted average cost of capital (WACC).

c) Its return on assets is always is equal to the weighted average cost of capital (WACC).

d) Its return on assets is always less than the weighted average cost of capital (WACC).

Q5) In the real world, where there are taxes and interest on debt is tax deductible, if two firms have the same cash flows as each other in all possible scenarios in the future, their valuation at any point will:

a) Will depend on the capital structures adopted by the firms.

b) Will depend on the method of valuation used.

c) Will depend on the capital structures adopted by the firms and the valuation method used

d) Will be the same as each other regardless of the method of valuation.

FINE 2000 Chapter Notes - Chapter 13: Weighted Arithmetic Mean, Capital Structure, Preferred Stock

Document Summary

Get access

Related Documents

FINE 2000 Lecture Notes - Lecture 13: Weighted Arithmetic Mean, Capital Asset, Cash Flow

FINE 2000 Chapter Notes - Chapter 13: Free Cash Flow, Financial Analyst, Weighted Arithmetic Mean

FINE 2000 Lecture Notes - Lecture 13: Dividend Discount Model, Capital Asset, Weighted Arithmetic Mean

Related Questions