FINC325 Final
WACC is used to discount
cash flows
The weighted average cost of capital is the overall expected return the firm must
earn on its existing assets to maintain its
value
US Treasury Instruments
-Never defaulted
-Not expected to default at this time
Non-cyclical good example
diapers
milk
Project discount rates should reflect
their particular level of risk
Are dividends to common stockholders fixed
no boi
Are dividends to preferred stock holders fixed?
yer
An investor who invests in the stock of a levered firm rather than in an all-equity
firm will require
a higher expected return
Brokers who sell stock on margin will protect themselves by
-selling the stock to satisfy the loan
-holding the stock as collateral
-requiring additional cash contributions from the investor
Alpha Co. has a D/E ratio of .6, a pretax cost of debt of 7.5%, and an unlevered
COE of 12%. Whats A's COE if you ignore tax?
12% + .6(12%-7.5%) = 14.7%
The manager of a firm should change the capital structure if and only if
the change will increase the value of the firm
, In absence of taxes, the value of a firm is the same with debt financing as it is
with equity financing because
the asset to be financed is the same and MM demonstrated that debt financing is
neither better nor worse than equity financing in the absence of taxes
MM Proposition I does not work with corporate taxes because
levered firms pay lower taxes than unlevered firms
proposition 2 says the WACC is a function of the risk of the firm's assets, not the
financing choices
An individual can duplicate a levered firm through _____ where the investor uses
his own funds plus borrow funds to buy stocks
homemade leverage
Capital Structure
The firms mix of debt and equity
When LVG increases, volatility/risk
increases
As LVG rises, COE
rises
Under the MM propositions with no taxes, managers cannot change the value of
the firm by repackaging its securities because
the overall cost of capital can't be reduced and as debt is added, the equity becomes
more risky
When calculating the cash flow for a levered firm, you must consider
cash flows to both bondholders and stockholders
A corporation gains no value from an interest tax shield. Which of the following
are true?
1. A corporation is an all-equity firm
2. The corporation has no debt
3. The corporate tax rates are zero
4. The D/E is 1
1, 2, 3
WACC is used to discount
cash flows
The weighted average cost of capital is the overall expected return the firm must
earn on its existing assets to maintain its
value
US Treasury Instruments
-Never defaulted
-Not expected to default at this time
Non-cyclical good example
diapers
milk
Project discount rates should reflect
their particular level of risk
Are dividends to common stockholders fixed
no boi
Are dividends to preferred stock holders fixed?
yer
An investor who invests in the stock of a levered firm rather than in an all-equity
firm will require
a higher expected return
Brokers who sell stock on margin will protect themselves by
-selling the stock to satisfy the loan
-holding the stock as collateral
-requiring additional cash contributions from the investor
Alpha Co. has a D/E ratio of .6, a pretax cost of debt of 7.5%, and an unlevered
COE of 12%. Whats A's COE if you ignore tax?
12% + .6(12%-7.5%) = 14.7%
The manager of a firm should change the capital structure if and only if
the change will increase the value of the firm
, In absence of taxes, the value of a firm is the same with debt financing as it is
with equity financing because
the asset to be financed is the same and MM demonstrated that debt financing is
neither better nor worse than equity financing in the absence of taxes
MM Proposition I does not work with corporate taxes because
levered firms pay lower taxes than unlevered firms
proposition 2 says the WACC is a function of the risk of the firm's assets, not the
financing choices
An individual can duplicate a levered firm through _____ where the investor uses
his own funds plus borrow funds to buy stocks
homemade leverage
Capital Structure
The firms mix of debt and equity
When LVG increases, volatility/risk
increases
As LVG rises, COE
rises
Under the MM propositions with no taxes, managers cannot change the value of
the firm by repackaging its securities because
the overall cost of capital can't be reduced and as debt is added, the equity becomes
more risky
When calculating the cash flow for a levered firm, you must consider
cash flows to both bondholders and stockholders
A corporation gains no value from an interest tax shield. Which of the following
are true?
1. A corporation is an all-equity firm
2. The corporation has no debt
3. The corporate tax rates are zero
4. The D/E is 1
1, 2, 3
