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CH14 - CHAPTER 14 An Overview of Corporate Financing...

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CHAPTER 14 An Overview of Corporate Financing Answers to Practice Questions 1. Internet exercise; answers will vary. 2. In general, using market values of equity results in lower debt-to-total capital ratios. This occurs because the book value of equity reflects historical values at the time of the original stock issues. Market values reflect not only the firm’s current operations but also the market’s expectations of future operations. 3. Besides the function of providing funds to industry, capital markets also provide managers with information. Without this information, it would be very difficult to determine the firm’s opportunity cost of capital or to assess the firm’s financial performance. Capital markets provide liquidity for investors. Because individual stockholders can always recover retained earnings by selling shares, they are willing to invest in companies that retain earnings rather than paying out earnings as dividends. Well-functioning capital markets allow the firm to serve all its stockholders simply by maximizing value.
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