Debt-Equity, APV, and WACC
Not what you're looking for?
Problem 14-2
Assume that MM's theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate.
a. How much of the firm's value is accounted for by the debt-generated tax shield?
b. How much better off will UF's a shareholder be if the firm borrows $20 more and uses it to repurchase stock?"
Problem 14-24
Some companies' debt-equity targets are expressed not as a debt ratio, but as a target debt rating on a firm's outstanding bonds. What are the pros and cons of setting a target rating, rather than a target ratio?
Problem 15-6
A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). What is the project's APV in the following cases?
a. If the firm invests, it has to raise $500,000 by a stock issue. Issue costs are 15% of net proceeds.
b. If the firm invests, its debt capacity increases by $500,000. The present value of interest tax shields on this debt is $76,000.
Problem 15-9
The WACC formula seems to imply that debt is "cheaper" than equity--that is, that a firm with more debt could use a lower discount rate. Does this make sense? Explain briefly.
Purchase this Solution
Solution Summary
Answers Corporate Finance Questions on MM, Debt-Equity, APV, and WACC.
Purchase this Solution
Free BrainMass Quizzes
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
IPOs
This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.