1. A lower cost of capital will lead to a higher firm value only if
a. the operating income does not change as the cost of capital declines.
b. the operating income goes up as the cost of capital goes down.
c. any decline in operating income is offset by the lower cost of capital.
Explain
2. Disney had a book value of equity of approximately $48.15 billion and a book value of debt of $14.3 billion. If you held the cost of equity and debt constant and replaced the market value weights in the cost of capital with book value weights, you will end up with
a. A lower cost of capital
b. A higher cost of capital
c. The same cost of capital
What are the implications for valuation?
3. The predicted debt ratio from the regression on pages 383-4 (Illustration 8.11) will generally yield
a. a debt ratio similar to the optimal debt ratio from the cost of capital approach.
b. a debt ratio higher than the optimal debt ratio from the cost of capital approach.
c. a debt ratio lower than the optimal debt ratio from the cost of capital approach. d. any of the above, depending on __________________
Explain
4. Closely held firms (where managers and insiders hold a substantial portion of the outstanding stock) are less likely to increase leverage quickly than firms with widely dispersed stockholdings.
True or False?
Explain.