1. Is it possible to reduce the risk of insolvency by acquiring a project whose cash flows are less than perfectly correlated with that of the firm?
2. Unlevered beta = 1.4, risk free rate = 8 percent and risk premium is 10 percent. What is the unlevered cost of equity?
1. How would you choose between dividends and stock repurchases as a CFO? What considerations might affect your decision?
2. What do you think would be the impact of dividend tax on cost of equity?
Marginal tax rate, variability of operating cash flows, creditors’ difficulty in monitoring a firm and need for flexibility are some of the factors that affect capital structure. What relationship between these variables and debt ratios do you expect to hold?
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