1.
a.
* If the discount rate is 0%, what is the project"s net present value?
NOTE: Double click the figure to see the formulas used.
* If the discount rate is 2%, what is the project"s net present value?
* If the discount rate is 6%, what is the project"s net present value?
* If the discount rate is 11%, what is the project"s net present value?
* With a cost of capital of 5%, what is this project"s modified internal rate of return?
Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. Connect the four points using a free hand "smooth" curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?
Discount rate
Net present value
0%
$670,000
2%
$614,353
6%
$514,816
11%
$408,997
46%
-$81
[You XXX"t XXXXXX the graph XXXX XXXXXXXXX. Look XX the graph you XXXX and XXXXX a XXXXX paragraph XXXXXXX what XXX XXXXX "shows"]
XXX XXXXX shows the net XXXXXXX XXXXX profile XX the cash XXXXX. The graph shows XXXX XXX net present value decreases XX the discount XXXX XXXXXXXXX. XXX XXX present value XXXXXXX the horizontal line at XXX point where XXX XXXXXXXX XXXX XX equal to the XXXXXXXX rate of XXXXXX (46%).
b* What XX XXXX project"s internal rate XX XXXXXX?
* If XXX discount XXXX XX X%, what XX XXXX project"s XXX XXXXXXX value?
* XX XXX XXXXXXXX rate is 4%, what XX XXXX XXXXXXX"s net XXXXXXX value?
* XX XXX discount rate is 10%, XXXX is this XXXXXXX"s XXX present XXXXX?
* If XXX XXXXXXXX XXXX XX 18%, what is this XXXXXXX"s net XXXXXXX XXXXX?
XXX draw (XXX yourself) a XXXXX where the XXXXXXXX rate is XX the XXXXXXXXXX XXXX (XXX "x" axis) and XXX net present value XX XXX vertical axis (the X XXXX). XXXX the net XXXXXXX value of the project as a function of XXX discount XXXX XX dots XXX the four XXXXXXXX XXXXX. XXXXXXX the four points using a free hand "smooth" XXXXX. XXX curve XXXXXXXXXX XXX horizontal line XX a particular discount rate. XXXX XX XXXX discount rate at which XXX XXXXX XXXXXXXXXX XXX horizontal axis?
XXXXXXXX rate
XXX XXXXXXX XXXXX
1%
$XX,XXX
4%
$X,XXX
$X
10%
-$91,777
18%
-$XXX,892
Observe XXX XXXXX XXX XXXXX a XXXXX paragraph XXXXXXX XXXX the XXXXX "shows
XXX XXXXX shows how the net present XXXXX, XX the XXXX XXXXX, XXXXX XXXXX to XXX discount XXXX XXXX for XXXXXXXXXXX. From XXX XXXXX you XXXX XXXXXXX that XX the discount rate increases XXX XXX present value, of XXX XXXXXXX, XXXXXXXXX XXXXX it crosses XXX horizontal XXXXX at the XXX (X.42%).
c)
XXXXX XXXXXX do you XXXXX XX the XXXXXX XXX XXX XXXXXX XXXXXXX XXXXXXXXX decisions - XXX or NPV?
XX XXXXXXX XXXXXXXXX, there XXX different XXXXXXXXXX XXXX XX XXXXXXXX any given project, XXX each approach has its XXXXXXXXXXX advantages XXX disadvantage
.All other things being XXXXX, XXXXX net present XXXXX (XXX) and internal rate XX XXXXXX (IRR) measurements to XXXXXXXX projects XXXXXX XXXXXXX in XXX same findings. Conversely, there XXX some of XXX projects XXXX XXX XXX XX using IRR XX not as XXXXXXXXX as compared XX the XXX XX to discount XXXX flows. XXX"s XXXX XXXXXXXX XX XXXX XXX XXXXXX strength: it uses one XXXXXX XXXXXXXX XXXX XX evaluate all investment.
XXXX if using XXX XXXXXXXX XXXX XXXXXXXXXX matters, there XXX situations XXXX to XXXXXXXX XXX XXX. XX an XXXXXXX XXXX XX XXXXXXXX XXX XXXXXXXX, both XX which XXXXX a XXXXXXXXXXX XXXX flows, common discount XXXX, a shorter XXXX horizon and XXXXX risk, IRR will XXXXXXXX work. The catch is XXXX XXXXXXXX XXXXX XXXXXX XXXXXXXXXXXXX over time. For XXXXXXXX, XXXXX XXX XXXX XX XXXXXX on a T-XXXX in XXX last 20 years as a XXXXXXXX rate. If one-year X-bills XXXXXXXX XXXXXXX X% XXX XX% in the XXXX XX XXXXX, noticeably the discount XXXX is changing.
Without modification, XXX XXXX XXX account XXX discount rates XXXXXXX, so it XX just XXX sufficient XXX XXXXXX-term projects with XXXXXXXX rates expected to XXXX
XXXXXXX XXXX of XXXXXXX, where a XXXXX IRR calculation is ineffective, is a project XXXXXX a mixture XX XXXXXXX positive and negative cash XXXXX. For instance, consider a project where XXXXXXXXX have to reinvent XXX style every XXXXXX XX years to stay XXXXXXX in a XXXXX, trendy niche market. For XXXXXXX ,a project XXX XXXX flows XX -$XX,000 in year XXX (XXXXXXX capital XXXXXX), returns XX $XXX,000 in year two and XXXXX XX $XX,XXX in year XXXXX XXXXX the XXXXXXXXX XXXXXXXXXX XXXX to XXXXXX the look XX XXX project, a single IRR cannot be XXXX. . XX market XXXXXXXXXX change XXXX the XXXXX, XXXX it can XXXX XXX or more IRRs, XX seen XXXXX.
Therefore, there XXX at least two solutions XXX XXX XXXXXX the equation zero. XXXX, there XXX different rates XX return for XXX project producing multiple XXXX. XXX XXXXXXX to using the XXX method here XX XXXX method can XXXXXX XXXXXXXX discount rates without XXXXXXXX. Each cash flow XXX XX discounted independently.
Another XXXXXXXXXXXX XXXX causes problems for users of the IRR method XX when XXX discount XXXX XX a XXXXXXX is XXX XXXXX. XXX the XXX XX XX a XXXXX XXXXXXXX of evaluating a XXXXXXX, it is XXXXXXXX to a discount XXXX. XX the IRR is more than XXX XXXXXXXX rate, the XXXXXXX XX feasible, XXX XX it XX XXXXX, it XX XXXXXXXXXX XXXXXXXXXX. If a discount XXXX cannot XX applied to a particular project XXX to a particular XXXXXX or XX XXX known, XXX IRR XXX a XXXXXXX XXXXX. XXX cases like XXXX, XXX NPV XXXXXX is better. XX a XXXXXXX"s NPV XX more than XXXX, XXXX it XX considered to be financially worthwhile.
To XXX XX XXX IRR method XX XXXXXXX due to a direct XXXXXX XX its XXXXXXXXX simplicity. The XXX method is XXXXXX complex XXX XXXXX assumptions XX each XXXXX - discount rate, the possibility XX receiving the XXXX XXXXXXX, etc. XXX IRR method XXXXXXXXXX XXXXXXXX XX a XXXXXXXX XXXXXX that management can use XX XXXXXXXXX whether or XXX a XXXXXXX XX XXXXXXXXXXXX viable. The result is simple, however for a XXXX-XXXX XXXXXXX , that has XXXXXXXX cash flows XX diverse discount XXXXX, or that has XXXXXXXXX cash flows - in XXXX, XXX XXXXXX XXX XXXXXXX XX all - simple IRR XX XXX XXXX XXX much more XXXX XXXXXXXXXXXX XXXXX.
2.
XXXX XXX the XXXXXXXXXX and XXXXXXXXXXXXX XXX AMSC XX forgo their debt XXXXXXXXX and XXXX XX equity XXXXXXXXX?
X capital structure is a mix XX permanent long-XXXX XXXXXXX XXXX by XXXXXXXXXXX in XXXXXXX XXXXX XXXXXXXXXX and meeting their XXXX-term project XXXXXXXXXX XXXXX. XXXXX are XXX XXXXXXX sources XXXX a firm XXX XXXXXXX XXXXXXX XXXX.
XXXX are XXXXXXXX (debts XXX XXXXXX) and XXXXXXXX (XXXXXXXX XXXXXXXX).The XXXXXXXX XXXXXXXX XXX XXXX part of XXXXX XXXXXXX or XXXXXX, XXX it is XXXX XX an XXXXXXXXXX in XXX XXXX XXXX XXX XXXXXXX XXXXXXXXXXXX for XXXXX XXXX will XXXXX XXXXXXX in XXXXXX. XXXXXXXXXX XXXXX XXX two XXX XXXXXXX XX XXXXXXX as XXXX XXX equity. Therefore, XXX XXXXXXX structure decisions XXX XXXXXXXXX XX adjustment of XXXX mix XX XXX XXXXXXXXX XXXXXX XXXXXX and debt, so XX to XXXXXXXX XXX market value of the firm and XXXXXXXX the average cost of XXXXXXX. XXXXXX, it is XXXX XXXX XXX mix of XXXXXX XXX debt XXXXXX XXXXXX industries XXX firms XXXXXXXXX on different XXXXXXX XXXX as kind of XXXXXX employed by the firm, type of XXXXXXXX, XXXX size XXX so XX.
XXXXXXXXX to XXXXXXXXX theory XX XXXXXXX XXXXXXXXX, states XXX XXXXXXX total XXXX XX XXXXXXX XXX XX decreased by adding XXXX XXXX in the capital structure. XXXX theory predicts an XXXXXXX level of equity and XXXX XXX that results in reduced average XXXX XX XXXXXXX XX a minimum level XXX the XXXX of firm’s value XX a XXXXXXX point. XXXXXXXXXXXX, XXXX XXXXXX XXXXXXX XXXX the XXXX’s value will XXXXX XXXXXXXXXX if XXX XXXX capital of XXX firm continues XX increase XXXXXX the optimal level XX a XXXXXX XX increased XXXX XXXXXXX XX XXX XXX XX extra debt. XXX predictions XX XXXX XXXXXX XXX based XX XXXXXXXXX assumptions:
. XXX XXXXXXXXXXX theory of XXXXXXX structure XXXXXXXXXX that there XXX XXXXX major XXXXXXXXX XXXXXX whereby XXX XXXXXXXXXXX of XXXXXX and debt XXXXXXXX XXXXXXX WACC and XXXXXX market values of the firm at XXXX XXXXX.
Based XX the traditional theory, the XXXXX stage XXXXXX when an XXXXXXXXXXX firm XXXX XXXXX XX XXXX its projects to a moderate extent. Up to XXXX XXXXX of XXXXXXXX XXXX of XXXXX XXXXXXX constant and the XXXX XX equity rise XXX resulting in reducing the XXXXXXX XXXX of XXXXXXX (XXXX).
XXXXXX XXXXXXXXXXXX indicates that XXX XXXXXXXX in cost of equity is XXXXXXXXXXXXX XX the XXXXXXX XXXXX XXXX XXXXXXX XXX rise in the XXXX of XXXXXX resulting in a XXXXXXXX average cost of capital (XXXX). Modigliani XXX XXXXXX (XXXX) XXXXXXX that XXX XXXXXXXXXXX XXXXXXX XXXXX XX the equal XXXXXXXXXXX value of XXX XXXX XXXXX that are XXXXXXX to XXXXXXX business risk XXX XX not XXXX same XXXXX.
XXXXXXX XXXX XXXXXX XXX XXXX XX XXX firm:
1. XXXXXXXXXX XXXXX Movement
X. XXXXXX XXXXX XXXXXXXX
X. XXXXXXXXXXX with market XXXXXXXX
4. Risky XXXXXX XX XXX XXXXX
X. Diversification XXXXXX XX the XXXXX
6. Volatility XX the stock in XXX XXXXX XXXXXX
XXX XXXXXX = (XXXX of XXXXXXXXX XXX or XX) (Debt XXXXX)
XXX XXX a company"s XXXX of XXXXXX be XXXXXXXXXX?
XXXXXXXXX XXXX XX equity can XX XXXXXXXXXX by XXXXXXX Asset XXXXXXX Model (CAPM ). This
XXX XXXXXXX of this XXXXX XX:
Cost XX XXXXXX=Risk free rate + XXXX * Risk Premium
XXX risk XXXXXXX is XXX sought after market XXXXXXX above the existing XXXX-free XXXX.
XXXX criticize XXX XXXXXXXXXXXXXX made XX the XXXXXXXXXXX XXXXXX XXXX XXXXX of XXXX in capital XXXXXXXXX XXXXXXXXX the XXXXXXX use XX XXXX in capital structure when XXXX XXXXXXXX extra XXXXXXX to run XXX operations. They XXXXX XXXX the XXXXX XX firm does not XXXXXX XX capital XXXXXXXXX decisions. XXXXXXXXX XX XX Proposition I, XXX XXXXX of XXXX is the determined by XXX XXXX flow and value XX XXXXXX instead of XXXXX XX debts and equity. Supporting this XXXXXXXX AMSC argue XXXX XXX XXXXXXX raised to XXXXXXX assets of the firm is not worth more than the XXXXXX XXXXX of XXX XXXXXX. XXXX, XX mix XX equity and debt is XXXXXX than other. XX’s XXXXXX XXXXX under XXXXXXX XXXXXXXXXXX XX no personal or corporate tax XXXXX, there is XXXXX XXXXXXX market exist XXX XXXXXXXXXXX and XXXXX XXX XXXXXX XXXXXXXXX XXXXXXX XX XXX same XXXXXXXX XXXX, and XXXXXXXX XXXXXXXXX is XXXXXXX great alternative for XXXXXXXXX XXXXXXXXX.
XXXX XXXXXXXXX XXXXX XXXXXXX view that XXX cost XX XXXXXXX and firm’s XXXXX can XXX be affected by debt XXXXX in capital XXXXXXXXX. MM’s proposition II state that the capital XXXXXXXXX XXXXXXXXX XXX XXXXXXXX XX the XXXX XXXX XXXXXXX XXXX and firm’s XXXXX is XXXXXXXX by the XXXXXXXXX decisions related to the XXXXXXXX ratio. Furthermore, XXXXXXXXXXX XX state XXXX expected a return XX stock XXXXXXXX XXXX a XXXXXXXX level. XXX “no corporate XXX” assumption XXX XXXXXXX in proposition ll, XXXXX XXXXX XXX XXXXXXX to XXX XXX benefit XXXX XXX of debt.
XX%
-$XX
[XXX can"t XXXXXX the XXXXX XXXX XXXXXXXXX. XXXX at the XXXXX you XXXX XXX write a short XXXXXXXXX stating XXXX XXX graph "shows"]
XXX graph shows the XXX present value XXXXXXX of XXX XXXX XXXXX. XXX graph shows that XXX XXX present XXXXX decreases XX the discount rate XXXXXXXXX. XXX XXX XXXXXXX value XXXXXXX the XXXXXXXXXX line at XXX point XXXXX XXX XXXXXXXX rate is XXXXX XX XXX internal XXXX of XXXXXX (46%).
b* What is XXXX project"s XXXXXXXX XXXX XX return?
* XX the discount rate is X%, XXXX XX XXXX XXXXXXX"s XXX XXXXXXX XXXXX?
* XX the discount XXXX is 4%, XXXX XX XXXX XXXXXXX"s XXX present value?
* If the discount rate is 10%, XXXX is XXXX XXXXXXX"s XXX XXXXXXX value?
* If the XXXXXXXX XXXX is XX%, XXXX XX this XXXXXXX"s XXX present value?
XXX draw (for XXXXXXXX) a XXXXX XXXXX the discount XXXX is on the horizontal axis (the "x" XXXX) XXX XXX XXX present XXXXX XX the XXXXXXXX XXXX (the X XXXX). Plot XXX XXX XXXXXXX XXXXX of the XXXXXXX XX a function XX XXX XXXXXXXX XXXX XX XXXX XXX the XXXX XXXXXXXX XXXXX. Connect the four points using a free XXXX "smooth" XXXXX. XXX curve intersects the XXXXXXXXXX XXXX XX a XXXXXXXXXX discount XXXX. What XX XXXX discount rate at XXXXX XXX graph intersects XXX horizontal axis?
Discount XXXX
XXX XXXXXXX value
X%
$65,XXX
$X,593
$0
-$XX,777
-$197,892
XXXXXXX the graph and write a short XXXXXXXXX XXXXXXX what XXX XXXXX "shows
XXX XXXXX XXXXX how XXX XXX present XXXXX, XX the XXXX flows, XXXXX react to the discount XXXX used for XXXXXXXXXXX. From the graph you XXXX XXXXXXX that as the XXXXXXXX XXXX increases XXX XXX XXXXXXX value, XX XXX project, XXXXXXXXX XXXXX it XXXXXXX the horizontal XXXXX at the XXX (4.XX%).
XXXXX XXXXXX XX you think XX the better one XXX XXXXXX capital XXXXXXXXX decisions - XXX or NPV?
In XXXXXXX budgeting, XXXXX XXX XXXXXXXXX approaches used to evaluate XXX XXXXX XXXXXXX, and each approach XXX XXX XXXXXXXXXXX advantages XXX disadvantage
.XXX other XXXXXX being XXXXX, using XXX XXXXXXX value (XXX) and internal rate XX XXXXXX (XXX) XXXXXXXXXXXX XX XXXXXXXX XXXXXXXX XXXXXX XXXXXXX in the same findings. Conversely, there XXX some of XXX projects that the XXX of XXXXX IRR is XXX XX XXXXXXXXX as XXXXXXXX to the XXX PV XX discount cash XXXXX. IRR"s main XXXXXXXX XX XXXX its XXXXXX strength: it uses one XXXXXX XXXXXXXX XXXX XX evaluate XXX investment.
Even if using XXX discount rate simplifies XXXXXXX, XXXXX are situations XXXX to XXXXXXXX XXX IRR. XX an XXXXXXX want to XXXXXXXX XXX XXXXXXXX, both of which XXXXX a XXXXXXXXXXX XXXX flows, XXXXXX XXXXXXXX XXXX, a XXXXXXX XXXX horizon and equal XXXX, XXX will possibly XXXX. XXX catch XX that discount rates change XXXXXXXXXXXXX over XXXX. For instance, XXXXX XXX rate XX XXXXXX XX a T-XXXX in XXX last 20 years XX a discount rate. XX one-year T-XXXXX XXXXXXXX XXXXXXX 1% XXX XX% in XXX last XX XXXXX, noticeably XXX discount XXXX is changing.
XXXXXXX XXXXXXXXXXXX, IRR does not XXXXXXX for XXXXXXXX rates changes, so it is XXXX XXX sufficient for longer-term XXXXXXXX with XXXXXXXX XXXXX XXXXXXXX XX XXXX
Another XXXX of XXXXXXX, XXXXX a basic XXX XXXXXXXXXXX is ineffective, XX a project XXXXXX a mixture XX several positive and XXXXXXXX XXXX flows. XXX instance, XXXXXXXX a project where XXXXXXXXX XXXX XX XXXXXXXX XXX style XXXXX XXXXXX XX XXXXX to stay XXXXXXX in a picky, trendy niche XXXXXX. For XXXXXXX ,a XXXXXXX has cash XXXXX of -$XX,000 in year XXX (XXXXXXX capital XXXXXX), XXXXXXX of $115,000 in XXXX XXX and costs XX $XX,XXX in year three XXXXX the marketing department need to revise XXX XXXX XX XXX XXXXXXX, a single XXX XXXXXX XX used. . If market XXXXXXXXXX change XXXX the years, then it XXX have two or more IRRs, XX XXXX XXXXX.
Therefore, XXXXX XXX at XXXXX XXX solutions XXX IRR making XXX XXXXXXXX zero. XXXX, XXXXX XXX XXXXXXXXX rXXXX XX XXXXXX XXX XXX project XXXXXXXXX XXXXXXXX IRRs. The XXXXXXX to XXXXX the NPV method XXXX XX this XXXXXX can handle XXXXXXXX discount rates XXXXXXX XXXXXXXX. XXXX XXXX flow XXX XX discounted XXXXXXXXXXXXX.
XXXXXXX XXXXXXXXXXXX that XXXXXX XXXXXXXX XXX users of the IRR method is XXXX XXX discount rate of a XXXXXXX XX not XXXXX. XXX the XXX to be a valid approach of evaluating a XXXXXXX, it XX XXXXXXXX XX a XXXXXXXX rate. XX XXX IRR is XXXX XXXX the XXXXXXXX XXXX, the project XX XXXXXXXX, and if it XX XXXXX, it is considered infeasible. XX a discount rate cannot be applied XX a XXXXXXXXXX project due XX a particular XXXXXX or is not XXXXX, XXX XXX XXX a XXXXXXX value. XXX XXXXX like XXXX, XXX XXX method is better. If a XXXXXXX"s NPV XX XXXX XXXX XXXX, XXXX it XX considered XX be XXXXXXXXXXX worthwhile.
To sum up XXX IRR method is popular due XX a direct XXXXXX of XXX reporting XXXXXXXXXX. The NPV method XX XXXXXX XXXXXXX XXX needs assumptions at XXXX XXXXX - XXXXXXXX rate, XXX XXXXXXXXXXX XX receiving XXX XXXX payment, XXX. XXX IRR method simplifies XXXXXXXX to a distinct number XXXX management can XXX XX determine whether or XXX a project is XXXXXXXXXXXX XXXXXX. The XXXXXX XX XXXXXX, XXXXXXX for a long-term XXXXXXX , XXXX XXX numerous XXXX XXXXX at XXXXXXX discount rates, or XXXX has XXXXXXXXX XXXX flows - in fact, XXX XXXXXX any project at all - XXXXXX XXX XX XXX XXXX XXX much XXXX than presentation value.
X.
XXXX XXX XXX XXXXXXXXXX and XXXXXXXXXXXXX for XXXX XX XXXXX their XXXX financing and XXXX XX equity financing?
X XXXXXXX structure is a XXX XX XXXXXXXXX long-XXXX XXXXXXX used by XXXXXXXXXXX in XXXXXXX XXXXX operations and meeting XXXXX long-term XXXXXXX XXXXXXXXXX XXXXX. There XXX XXX XXXXXXX sources XXXX a XXXX can acquire XXXXXXX from.
They XXX XXXXXXXX (XXXXX XXX XXXXXX) XXX internal (retained XXXXXXXX).The XXXXXXXX earnings are XXXX part of share XXXXXXX or XXXXXX, and it is seen XX an investment in XXX XXXX from XXX current shareholders XXX which they will large returns in future. Ultimately there are XXX key sources XX finance XX XXXX and XXXXXX. XXXXXXXXX, the XXXXXXX XXXXXXXXX decisions are XXXXXXXXX XX XXXXXXXXXX of this mix XX XXX XXXXXXXXX XXXXXX equity XXX debt, so as to XXXXXXXX the market XXXXX of XXX XXXX XXX XXXXXXXX the XXXXXXX cost XX XXXXXXX. Mostly, it XX XXXX XXXX the XXX of XXXXXX XXX debt varies across XXXXXXXXXX XXX XXXXX depending XX XXXXXXXXX XXXXXXX such XX XXXX of XXXXXX employed XX XXX firm, XXXX XX industry, firm size XXX so XX.
According to XXXXXXXXX theory XX capital structure, states XXX average XXXXX cost XX capital XXX XX XXXXXXXXX by adding more debt in XXX XXXXXXX XXXXXXXXX. This XXXXXX predicts an XXXXXXX level XX XXXXXX and debt mix XXXX results in reduced average XXXX XX XXXXXXX to a minimum XXXXX XXX the rise of XXXX’s XXXXX to a XXXXXXX XXXXX. XXXXXXXXXXXX, this theory XXXXXXX that the firm’s value will XXXXX XXXXXXXXXX if XXX debt XXXXXXX XX the XXXX XXXXXXXXX to XXXXXXXX beyond the XXXXXXX level as a XXXXXX XX increased XXXX XXXXXXX by the use XX XXXXX XXXX. XXX predictions XX this theory are XXXXX XX following assumptions:
. XXX XXXXXXXXXXX theory of XXXXXXX XXXXXXXXX XXXXXXXXXX XXXX there are three major XXXXXXXXX stages XXXXXXX XXX combination XX XXXXXX XXX debt reflects XXXXXXX XXXX XXX varied XXXXXX values of the firm at XXXX stage.
XXXXX on XXX traditional theory, the XXXXX stage XXXXXX XXXX an unleveraged firm XXXX debts to XXXX XXX projects to a XXXXXXXX extent. Up XX XXXX XXXXX XX XXXXXXXX XXXX of XXXXX remains XXXXXXXX XXX the XXXX of XXXXXX rise and XXXXXXXXX in XXXXXXXX the overall XXXX XX capital (WACC).
XXXXXX XXXXXXXXXXXX indicates that the increase in XXXX XX XXXXXX XX proportionate XX the gearing ratio XXXX XXXXXXX XXX rise in the XXXX of equity XXXXXXXXX in a XXXXXXXX XXXXXXX XXXX XX XXXXXXX (XXXX). Modigliani and Miller (XXXX) propose that the XXXXXXXXXXX process XXXXX to the equal XXXXXXXXXXX value XX XXX such XXXXX that are XXXXXXX XX similar business risk XXX XX not have same XXXXX.
XXXXXXX that XXXXXX the Beta of the firm:
X. Historical price Movement
X. XXXXXX XXXXX Movement
3. Correlation XXXX XXXXXX XXXXXXXX
X. XXXXX XXXXXX XX the Stock
5. XXXXXXXXXXXXXXX XXXXXX of the stock
6. XXXXXXXXXX of XXX XXXXX in the given market
Tax XXXXXX = (rate of corporate XXX or XX) (XXXX XXXXX)
How can a XXXXXXX"s XXXX XX equity be XXXXXXXXXX?
Companies cost of equity XXX XX XXXXXXXXXX by XXXXXXX XXXXX XXXXXXX XXXXX (XXXX ). XXXX
XXX formula of this XXXXX is:
Cost of Equity=Risk XXXX rate + Beta * Risk XXXXXXX
XXX XXXX XXXXXXX is the sought XXXXX XXXXXX premium above the XXXXXXXX risk-free rate.
XXXX XXXXXXXXX XXX interpretation XXXX by the XXXXXXXXXXX XXXXXX that XXXXX XX XXXX in capital structure influence the further use XX XXXX in XXXXXXX structure XXXX XXXX requires XXXXX XXXXXXX to run XXX XXXXXXXXXX. XXXX XXXXX XXXX XXX XXXXX of firm XXXX XXX depend on capital XXXXXXXXX decisions. According XX XX Proposition I, the value of firm is XXX determined by the cash flow and XXXXX XX assets instead of value of debts XXX XXXXXX. XXXXXXXXXX this XXXXXXXX AMSC XXXXX that the capital raised XX XXXXXXX assets of XXX firm XX XXX XXXXX more than the market value XX XXX assets. Thus, XX mix of equity and debt is better than other. MM’s XXXXXX holds XXXXX XXXXXXX assumptions as XX personal or XXXXXXXXX XXX XXXXX, there is ideal XXXXXXX market XXXXX for individuals and firms XXX XXXXXX XXXXXXXXX XXXXXXX at the same interest XXXX, XXX personal borrowing XX XXXXXXX great alternative for corporate borrowing.
AMSC corrected their earlier XXXX XXXX XXX XXXX XX XXXXXXX and firm’s value can not be XXXXXXXX by debt XXXXX in capital XXXXXXXXX. MM’s proposition XX state XXXX XXX XXXXXXX XXXXXXXXX XXXXXXXXX are XXXXXXXX by the fact that capital cost and XXXX’s XXXXX XX affected XX the financing decisions XXXXXXX XX XXX XXXXXXXX XXXXX. XXXXXXXXXXX, proposition II state XXXX XXXXXXXX a return on stock improved XXXX a leverage level. The “XX XXXXXXXXX tax” XXXXXXXXXX XXX XXXXXXX in XXXXXXXXXXX ll, hence firms are XXXXXXX XX XXX tax benefit from use XX debt.