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3. Which of the following does NOT always increase a company's market value?
a. Increasing the expected growth rate of sales.
b. Increasing the expected operating profitability (NOPAT/Sales).
c. Decreasing the capital requirements (Capital/Sales).
d. Decreasing the weighted average cost of capital.
e. Increasing the expected rate of return on invested capital.
Discuss fully the reasons for your choice.
4. Your firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is the value of your firm's tax shield, i.e., how much value does the use of debt add?
a. $92,571
b. $102,857
c. $113,143
d. $124,457
e. $136,903
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The solution explains some multiple choice questions in finance
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3. a. Increasing the expected growth rate of sales.
The market value will increase if the profitability increases. Increasing the growth rate in sales may not necessarily increase the profits since the sales growth may be by ...
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