A) HD should have a higher return on assets (ROA) than LD.
B) HD should have a higher times interest earned (TIE) ratio than LD.
C) HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's.
D) Given that BEP > rd, HD's stock price must exceed that of LD.
E) Given that BEP > rd, LD's stock price must exceed that of HD.
G) A) and C)
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A) When a company increases its debt ratio, the costs of equity and debt both increase. Therefore, the WACC must also increase.
B) The capital structure that maximizes the stock price is generally the capital structure that also maximizes earnings per share.
C) All else equal, an increase in the corporate tax rate would tend to encourage a company to increase its debt ratio.
D) Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase its WACC.
E) Since debt is cheaper than equity, increasing a company's debt ratio will always reduce its WACC.
G) A) and E)
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A) 4,513
B) 4,750
C) 5,000
D) 5,250
E) 5,513
G) B) and D)
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A) 11,001; $28.85
B) 12,711; $35.62
C) 13,901; $42.57
D) 15,220; $54.31
E) 17,105; $89.67
G) None of the above
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B) False
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B) False
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A) Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
B) Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
C) Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
D) Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
E) Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
G) All of the above
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B) False
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A) 10.95%
B) 11.91%
C) 12.94%
D) 14.07%
E) 15.29%
G) C) and D)
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B) False
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A) Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.
B) An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.
C) If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.
D) An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.
E) An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.
G) B) and E)
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A) An increase in costs incurred when filing for bankruptcy.
B) An increase in the corporate tax rate.
C) An increase in the personal tax rate.
D) The Federal Reserve tightens interest rates in an effort to fight inflation.
E) The company's stock price hits a new low.
G) All of the above
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A) 2.18%
B) 2.29%
C) 2.41%
D) 2.54%
E) 2.66%
G) A) and D)
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A) $49.43
B) $50.70
C) $52.00
D) $53.33
E) $56.00
G) B) and C)
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A) Since the proposed plan increases Volga's financial risk, the company's stock price still might fall even if EPS increases.
B) If the plan reduces the WACC, the stock price is also likely to decline.
C) Since the plan is expected to increase EPS, this implies that net income is also expected to increase.
D) If the plan does increase the EPS, the stock price will automatically increase at the same rate.
E) 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.
G) A) and C)
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A) normally lead to an increase in its fixed assets turnover ratio.
B) normally lead to a decrease in its business risk.
C) normally lead to a decrease in the standard deviation of its expected EBIT.
D) normally lead to a decrease in the variability of its expected EPS.
E) normally lead to a reduction in its fixed assets turnover ratio.
G) B) and C)
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A) $14.42
B) $19.36
C) $23.91
D) $28.85
E) $35.62
G) B) and D)
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A) $498,339
B) $512,188
C) $525,237
D) $540,239
E) $590,718
G) All of the above
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A) The two companies have the same times interest earned (TIE) ratio.
B) Firm L has a lower ROA than Firm U.
C) Firm L has a lower ROE than Firm U.
D) Firm L has the higher times interest earned (TIE) ratio.
E) Firm L has a higher EBIT than Firm U.
G) A) and D)
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A) The capital structure that maximizes the stock price is also the capital structure that minimizes the weighted average cost of capital (WACC) .
B) The capital structure that maximizes the stock price is also the capital structure that maximizes earnings per share.
C) The capital structure that maximizes the stock price is also the capital structure that maximizes the firm's times interest earned (TIE) ratio.
D) Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, this still may raise the company's WACC.
E) If Congress were to pass legislation that increases the personal tax rate but decreases the corporate tax rate, this would encourage companies to increase their debt ratios.
G) A) and B)
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