these will be killer if they appear and using wrong formula to get right answer would be the trick!!
Forgot to check for more than one page, nevermind, but I was guessing D.
Hang on a minute. This is a bullsh1t question, surely. From a firm perspective, if debt increases, required return on equity increases-YES But the required return on the debt it’s just got hold of is proportionally much lower, and will take the WACC down (assuming a non-outrageous starting point). So for FCFF: A) increase should be right IMO. For FCFE the required return on Equity will increase, meaning that: C) decrease would be right. Thoughts?
yeah, i mentioned the cost of capital… i don’t see whatsoever that increasing debt will increase R, unless you started at optimal WACC, which it doesn’t say and i wouldn’t assume (but that’s what these questions do, they make you wonder if you should assume something)
the cost of equity will always go up whenever leverage increases and cost of equity is used in FCFE based calculation of stock price. the assumption in the problem was no increase of cash flow growth -> P decreases
© I’d say decreases. Assets=Liab.+Eqt. --------------------- Eqt. it’s given that this increases, so Eqt. is constant, and LIAB increases. Let’s assume that they issued tons and tons of leverage (i.e. issued bonds). Initially, this, without a doubt, has increased the CashFlowsFinance. P/CF = Price / (CFO + CFF + CFI), and CFI Doesn’t change. CFO = (S-C-D)(1-T)+D, and I don’t think that this is so consequential in the first year. The P/CF would DECREASE because of more CFF.