Question

Assume that Bookscape is planning to go public in six months. How would this information change...

  1. Assume that Bookscape is planning to go public in six months. How would this information change your assessment of the optimal debt ratio? WHY?
    • It will increase the optimal debt ratio because only market risk counts for a publicly traded firm.
    • It may increase or decrease the optimal debt ratio, depending on which effect dominates.
Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Soln. The optimal debt ratio is the equal proportion mix of debt and equity for a firm. Debt-equity ratio, if more than 0.5 it indicates that majority of assets are financed through debt and if the Debt-equity ratio is less than 0.5, it indicates that majority of assets are financed through equity.

When a firm goes public, the optimal debt ratio depends on several parameters and hence based on those conditions, it may increase or decrease. The factors that decides the optimal debt ratio is not only market risk exposure rather it also depends on exposure of business risk, amount of tax liabilities, cash flows, operation and organization structure. Hence, option second is correct outcome.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
18.5 Amarindo, Inc. (AMR), is a newly public firm with 9.0 million shares outstanding. You are...
18.5 Amarindo, Inc. (AMR), is a newly public firm with 9.0 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $14.75 million, and you expect the firm's free cash flows to grow by 4.3 % per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR's equity beta....
POINT/COUNTER-POINT: Should Firms That Go Public Engage in International Offerings? POINT: Yes. When a U.S. firm...
POINT/COUNTER-POINT: Should Firms That Go Public Engage in International Offerings? POINT: Yes. When a U.S. firm issues stock to the public for the first time in an initial public offering (IPO), it is naturally concerned about whether it can place all of its shares at a reasonable price. It will be able to issue its stock at a higher price by attracting more investors. It will increase its demand by spreading the stock across countries. The higher the price at...
All else equal, an increase in customers' reservation prices will have what effect on the value...
All else equal, an increase in customers' reservation prices will have what effect on the value generated by a business? It will be unaffected It will decrease It will increase Question 2 An increase in the value of resources in an alternate use will have what effect on the ability of a company to generate value using those resources? it will be unaffected It will decrease It will increase Question 3 Which sequence of planning communication is most appropriate? Analyze...
9. What can be taken off a credit report? A. Only Inaccurate items but not public...
9. What can be taken off a credit report? A. Only Inaccurate items but not public records B. Any inaccurate, incomplete, unverifiable accounts, old personal information and public records C. All information can come off at will D. Both A and B E. None above 10. How can one establish credit? A. Apply for a credit card B. Apply for a secured credit card C. Apply for a secured bank loan D. Become an authorized users in someone’s else credit...
5. The amount of debt capital used by a corporation is not related to the availability...
5. The amount of debt capital used by a corporation is not related to the availability of equity funds from retained earnings and new common stock. True False 6. The cost of new common stock is greater than the cost of outstanding common stock. True False 7. In determining the cost of preferred stock, the earnings on outstanding preferred stock may be used as a proxy. True False 8. The out-of-pocket cost of common stock is a good approximation of...
Months into the COVID-19 pandemic, which continues to affect a growing number of countries and people,...
Months into the COVID-19 pandemic, which continues to affect a growing number of countries and people, 1 the responses to our newest McKinsey Global Survey on economic sentiment confirm the extent of the damage so far. 2 Respondents are much likelier now than in March (52 percent, up from 10 percent) to say their countries’ economies have declined substantially in recent months, and more than twice as likely to report substantially worse conditions in the global economy. Across geographies, vast...
QUESTION 21 One implication of the tradeoff theories of capital structure decision is that firms that...
QUESTION 21 One implication of the tradeoff theories of capital structure decision is that firms that are likely to pay taxes at high rates should carry more debt than firms in lower tax brackets. True False 1.00000 points    QUESTION 22 One implication of the tradeoff theories of capital structure decision is that risky firms, as measures by the variability of asset returns, ought to borrow more, other things equal. True False 1.00000 points    QUESTION 23 The pecking order...
48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63...
48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 QUESTION 1 All of the following are management’s objectives in designing effective internal controls over financial reporting (ICFR) except for ______________ ? a. Comply with section 404 of the Sarabanes Oxley (SOX) act. b. Producing accurate and complete financial statements and other reports to make operational decisions. c. Ensure reliability of financial reporting d. Management review of the year-end financial statements to ensure proper...
(2pts)Which of the following is not mentioned in the lecture note as an additional risk factor...
(2pts)Which of the following is not mentioned in the lecture note as an additional risk factor resulting from international business? exchange rate fluctuations political risk interest rate risk None of the above (2pts) Factor income from international investment is a component of financial account in the balance of payments True                                   b) False (2pts) Bid-Ask spread on currency quotation will be wider if the currency exhibits more volatility than others because of the country’s uncertain economic conditions True                                   b) False (2pts)...
You are an Audit Senior currently planning the 30 June 20X8 audit of Forest Limited, an...
You are an Audit Senior currently planning the 30 June 20X8 audit of Forest Limited, an Australian-owned company that produces and exports woodchips to Japan. Forest’s operations are located in Eden, on the far south coast of NSW. Timber is purchased from forests nearby, processed into woodchips and immediately stockpiled for export at the company’s shipyards at Twofold Bay. Forest contracts timber cutters to deliver set tonnages of logs to its mill throughout the year. Woodchips are transported to Japan...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT