Questions from Corporate Finance

Q: Williamson, Inc., has a debt–equity ratio of 2

Williamson, Inc., has a debt–equity ratio of 2.5. The firm’s weighted average cost of capital is 10 percent, and its pretax cost of debt is 6 percent. Williamson is subject to a corporate tax rate of...

Q: In a world of corporate taxes only, show that the R

In a world of corporate taxes only, show that the R WACC can be written as R WACC = R0 × [1 – tC ( B/V )].

Q: Assuming a world of corporate taxes only, show that the cost

Assuming a world of corporate taxes only, show that the cost of equity, R S, is as given in the chapter by MM Proposition II with corporate taxes.

Q: Assume a firm’s debt is risk-free, so that the

Assume a firm’s debt is risk-free, so that the cost of debt equals the risk-free rate, R f . Define βA as the firm’s asset beta—that is, the systematic risk of the firm’s assets. Define βS to be the b...

Q: Suppose a firm’s business operations mirror movements in the economy as a

Suppose a firm’s business operations mirror movements in the economy as a whole very closely—that is, the firm’s asset beta is 1.0. Use the result of previous problem to find the equity beta for this...

Q: Beginning with the cost of capital equation—that is:

Beginning with the cost of capital equation—that is: show that the cost of equity capital for a levered firm can be written as follows:

Q: In a world with no taxes, no transaction costs, and

In a world with no taxes, no transaction costs, and no costs of financial distress, is the following statement true, false, or uncertain? If a firm issues equity to repurchase some of its debt, the pr...

Q: Money, Inc., has no debt outstanding and a total market

Money, Inc., has no debt outstanding and a total market value of $275,000. Earnings before interest and taxes, EBIT, are projected to be $21,000 if economic conditions are normal. If there is strong e...

Q: In broad terms, why is some risk diversifiable? Why are

In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of sys...

Q: For each of the following scenarios, discuss whether profit opportunities exist

For each of the following scenarios, discuss whether profit opportunities exist from trading in the stock of the firm under the conditions that (1) the market is not weak form efficient, (2) the marke...