Chapter10 - Name: Nguyen Thi Lan Thanh Student ID: 1236311...

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Name: Nguyen Thi Lan Thanh Student ID: 1236311 Class: Friday Morning CHAPTER 10 Questions 10.1/ How would each of the following scenarios affect a firm’s cost of debt, r d (1 – T); its cost of equity, r s ; and its WACC? Indicate with a plus (+), a minus (-), or a zero (0) if the factor would raise, would lower, or would have an indeterminate effect on the item in question. Assume for each answer that other things are held constant even though in some instances this would probably not be true. Be prepared to justify your answer but recognize that several of the parts have no single correct answer. These questions are designed to stimulate thought and discussion. rd(1 – T) EFFECT ON r d (1 – T) r s WACC a.The corporate tax rate is lower. + 0 + b.The Federal Reserve tightens credit. + + + c.The firm uses more debt; that is, it increases its debt/assets ratio. + + 0 d.The dividend payout ratio is increased. 0 0 0 e.The firm doubles the amount of capital it raises during the year. 0 or + 0 or + 0 or + f.The firm expands into a risky new area. + + + g. The firm merges with another firm whose earnings are countercyclical both to those of the first firm and to the stock market. -
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This note was uploaded on 11/23/2011 for the course MANAGEMENT 101 taught by Professor Nguyen during the Spring '11 term at Troy.

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Chapter10 - Name: Nguyen Thi Lan Thanh Student ID: 1236311...

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