Questions from Corporate Finance

Q: The common stock and debt of Northern Sludge are valued at $

The common stock and debt of Northern Sludge are valued at $50 million and $30 million, respectively. Investors currently require a 16% return on the common stock and an 8% return on the debt. If Nort...

Q: Suppose that Macbeth Spot Removers issues only $2,500 of

Suppose that Macbeth Spot Removers issues only $2,500 of debt and uses the proceeds to repurchase 250 shares. a. Rework Table 17.2 to show how earnings per share and share return now vary with operati...

Q: True or false? a. MM’s propositions assume perfect financial

True or false? a. MM’s propositions assume perfect financial markets, with no distorting taxes or other imperfections. b. MM’s proposition 1 says that corporate borrowing increases earnings per share...

Q: Refer to Section 17-1. Suppose that Ms. Macbeth’s

Refer to Section 17-1. Suppose that Ms. Macbeth’s investment bankers have informed her that since the new issue of debt is risky, debtholders will demand a return of 12.5%, which is 2.5% above the ris...

Q: Companies A and B differ only in their capital structure. A

Companies A and B differ only in their capital structure. A is financed 30% debt and 70% equity; B is financed 10% debt and 90% equity. The debt of both companies is risk-free. a. Rosencrantz owns 1%...

Q: Here is a limerick: There once was a man named

Here is a limerick: There once was a man named Carruthers, Who kept cows with miraculous udders. He said, “Isn’t this neat? They give cream from one teat, And skim milk from each of the others!” What...

Q: Suppose all plant and division managers were paid only a fixed salary

Suppose all plant and division managers were paid only a fixed salary—no other incentives or bonuses. a. Describe the agency problems that would appear in capital investment decisions. b. How would ty...

Q: Executive Chalk is financed solely by common stock and has outstanding 25

Executive Chalk is financed solely by common stock and has outstanding 25 million shares with a market price of $10 a share. It now announces that it intends to issue $160 million of debt and to use t...

Q: Executive Cheese has issued debt with a market value of $100

Executive Cheese has issued debt with a market value of $100 million and has outstanding 15 million shares with a market price of $10 a share. It now announces that it intends to issue a further $60 m...

Q: Indicate what’s wrong with the following arguments: a. “

Indicate what’s wrong with the following arguments: a. “As the firm borrows more and debt becomes risky, both stockholders and bondholders demand higher rates of return. Thus by reducing the debt rati...