Suppose a firm uses a constant WACC to calculate the NPV of all of its capital budgeting projects, rather than adjusting for the risk of the individual projects. What errors will the firm make in its capital budgeting decisions?
Answer to relevant QuestionsA firm has the following capital structure based on market values: equity 65 percent and debt 35 percent. The current yield on government T-bills is 2 percent, the expected return on the market portfolio is 10 percent, and ...What is the cost of equity (Ke) given RF = 2%, beta (β) = 1.5, expected market return (ERM) =12%?What is the intercept and slope of the financial leverage (ROE-ROI) line in Practice Problem 13? Explain the meaning of the slope. What is the pecking order according to Myers’ argument?In the M&M no-tax world, calculate the value of the levered firm (VL). Cost of unlevered equity (KU) = 15%; cost of debt (KD) = 7%; debt (D) = $400,000; and NI = $520,000. What is the cost of levered equity?Describe the factors that can affect a firm’s capital structure in practice.
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