Questions from Corporate Finance

Q: Explain why the required rate of return on a firm’s assets must

Explain why the required rate of return on a firm’s assets must be equal to the weighted average cost of capital associated with its liabilities and equity?

Q: What are the differences between capital projects that are independent, mutually

What are the differences between capital projects that are independent, mutually exclusive, and contingent?

Q: Your boss just finished computing your firm’s weighted average cost of capital

Your boss just finished computing your firm’s weighted average cost of capital. He is relieved because he says that he can now use that cost of capital to evaluate all projects that the firm is consid...

Q: Which is easier to calculate directly, the expected rate of return

Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity? Assume that you are an outsider to the firm?

Q: With respect to the level of risk and the required return for

With respect to the level of risk and the required return for a firm’s portfolio of projects, discuss how the market and a firm’s management can have inconsistent information and expectations?

Q: Your friend has recently told you that the federal government effectively subsidizes

Your friend has recently told you that the federal government effectively subsidizes the use of debt financing (vs. equity financing) for corporations. Do you agree with that statement? Explain?

Q: Your firm will have a fixed interest expense for the next 10

Your firm will have a fixed interest expense for the next 10 years. You recently found out that the marginal income tax rate for the firm will change from 30 percent to 40 percent next year. Describe...

Q: Describe why it is not usually appropriate to use the coupon rate

Describe why it is not usually appropriate to use the coupon rate on a firm’s bonds to estimate the pretax cost of debt for the firm?

Q: Maltese Falcone, Inc., has not checked its weighted average cost

Maltese Falcone, Inc., has not checked its weighted average cost of capital for four years. Firm management claims that since Maltese has not had to raise capital for new projects in four years, they...

Q: Ten years ago, the Edson Water Company issued preferred stock at

Ten years ago, the Edson Water Company issued preferred stock at a price equal to the par value of $100. If the dividend yield on that issue was 12 percent, explain why the firm’s current cost of pref...