A) If the plan reduces the WACC,the stock price is also likely to decline.
B) Since the plan is expected to increase EPS,this implies that net income is also expected to increase.
C) If the plan does increase the EPS,the stock price will automatically increase at the same rate.
D) Under the plan there will be more bonds outstanding,and that will increase their liquidity and thus lower the interest rate on the currently outstanding bonds.
E) Since the proposed plan increases Daylight's financial risk,the company's stock price still might fall even if EPS increases.
G) None of the above
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B) False
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B) False
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A) Since debt financing is cheaper than equity financing,raising a company's debt ratio will always reduce its WACC.
B) Increasing a company's debt ratio will typically reduce the marginal cost of both debt and equity financing.However,this action still may raise the company's WACC.
C) Increasing a company's debt ratio will typically increase the marginal cost of both debt and equity financing.However,this action still may lower the company's WACC.
D) Since a firm's beta coefficient it not affected by its use of financial leverage,leverage does not affect the cost of equity.
E) Since debt financing raises the firm's financial risk,increasing a company's debt ratio will always increase its WACC.
G) A) and E)
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B) False
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A) An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
B) If changes in the bankruptcy code make bankruptcy less costly to corporations,then this would likely reduce the debt ratio of the average corporation.
C) An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.
D) An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.
E) Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs,hence they tend to use relatively little debt.
G) C) and D)
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A) 5,000 decks
B) 10,000 decks
C) 15,000 decks
D) 20,000 decks
E) 25,000 decks
G) B) and D)
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A) 1.53%
B) 1.70%
C) 1.87%
D) 2.05%
E) 2.26%
G) A) and D)
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B) False
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A) Sales price variability.
B) The extent to which operating costs are fixed.
C) The extent to which interest rates on the firm's debt fluctuate.
D) Input price variability.
E) Demand variability.
G) A) and B)
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A) If a firm lowered its fixed costs while increasing its variable costs,holding total costs at the present level of sales constant,this would decrease its operating leverage.
B) The debt ratio that maximizes EPS generally exceeds the debt ratio that maximizes share price.
C) If a company were to issue debt and use the money to repurchase common stock,this action would have no impact on its basic earning power ratio.(Assume that the repurchase has no impact on the company's operating income. )
D) If changes in the bankruptcy code made bankruptcy less costly to corporations,this would likely reduce the average corporation's debt ratio.
E) Increasing financial leverage is one way to increase a firm's basic earning power (BEP) .
G) B) and C)
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B) False
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A) Electric utilities generally have very high common equity ratios because their revenues are more volatile than those of firms in most other industries.
B) Drug companies (prescription,not illegal!) generally have high debt-to-equity ratios because their earnings are very stable and,thus,they can cover the high interest costs associated with high debt levels.
C) Wide variations in capital structures exist both between industries and among individual firms within given industries.These differences are caused by differing business risks and also managerial attitudes.
D) Since most stocks sell at or very close to their book values,book value capital structures are almost always adequate for use in estimating firms' costs of capital.
E) Generally,debt-to-total-assets ratios do not vary much among different industries,although they do vary among firms within a given industry.
G) None of the above
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A) The factors that affect a firm's business risk are affected by industry characteristics and economic conditions.Unfortunately,these factors are generally beyond the control of the firm's management.
B) One of the benefits to a firm of being at or near its target capital structure is that this eliminates any risk of bankruptcy.
C) A firm's financial risk can be minimized by diversification.
D) The amount of debt in its capital structure can under no circumstances affect a company's business risk.
E) A firm's business risk is determined solely by the financial characteristics of its industry.
G) A) and E)
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B) False
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B) False
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B) False
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A) normally lead to a decrease in its business risk.
B) normally lead to a decrease in the standard deviation of its expected EBIT.
C) normally lead to a decrease in the variability of its expected EPS.
D) normally lead to a reduction in its fixed assets turnover ratio.
E) normally lead to an increase in its fixed assets turnover ratio.
G) A) and C)
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A) 13.00%
B) 13.64%
C) 14.35%
D) 14.72%
E) 15.60%
G) C) and E)
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B) False
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