Question

True or false.

In DCF valuation, a company can increase its equity value by borrowing more money provided that the after-tax cost of debt exceeds the return on capital. (Assume all other inputs are fixed.

Answer #2

**Answer-**

**The statement is False.**

**In DCF valuation**

**The company cannot increase its equity value by
borrowing more money, however company can increase its equity value
by selling shares of stock, raising the company's revenues and
decreasing its operating expenses.**

**The condition after-tax cost of debt exceeds the return
on capital is not relevant as by borrowing more money the debt is
increased but not the equity. By borrowing more money the cost of
equity increases due to increase in leverage or debt but there is
no increase in equity value.**

answered by: anonymous

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(ROE) by increasing
its leverage ratio if and only if its return on capital (ROC)
exceeds its after-tax cost of
debt (rd x (1 - Tc)). (Assume all other inputs are fixed.)
2) In the context of the dividend discount model (DDM), a
company can always increase
its intrinsic equity value by increasing its dividend payout ratio
if and only if...

the Enterprise Value of a firm (using the DCF valuation
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When might a increase short-term gain but at the cost of
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Prokter and Gramble (PG) has historically maintained a
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believes it can increase debt without any serious risk of distress
or other costs. With a higher debt-to-equity ratio of 0.6, it
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Assets
Liabilities
Fixed Investments
£18,000
Debt
?
Equity
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The beta of Dell’s fixed investments is 1.5. The risk-free rate
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QUESTION TWO
The Ex Nihilo Corporation has a debt-equity ratio of 0.5.
Details of the balance sheet are given in Table 3.
Table 3: Ex Nihilo Co’s balance sheet (market values, numbers in
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Assets
Liabilities
Fixed Investments
£18,000
Debt
6000
Equity
12000
WACC=0.09/9%
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