i must be tired but i couldnt get sense of this question: Which of the following would most likely lead to an increase in a firm’s capital investment in projects of average risk for the current project? A. an increase in the firm’s expected growth rate B. an increase in the firm’s expected marginal tax rate C. an increase in the firm’s systematic risk as measured by beta D. a decrease in the price of the firm’s debt Do you understand what the question is? And what is the right answer? Thanks
My guess is B. The increased tax rate will decrease the WACC and thus average projects will become more profitable (IRR > WACC). Not 100% sure but that is my answer and reasoning.
perfectly right! bravo. wish i could get the same reasoning!
I dont agree, though i respect that schweser is right. My reading of the answers would conclude that b and d are saying the same thing. both are decreasing the after tax cost of debt. so either would be reasonable under that premise.
@Biz… if they price of debt is dropping, the yield is going up- thus increasing the cost of debt.
the way that i read the question is what will cause the firm’s capex to increaes …
Biz, like jmh said, I think “price” here means “value,” therefore the yield or cost of debt would increase, thereby decreasing the profits all else equal.
Given the following options, I would go for A by eliminating other 3 options B. an increase in the firm’s expected marginal tax rate - will decrease the project’s after tax cash flow. C. an increase in the firm’s systematic risk as measured by beta - increase in risk will increase the required rate of return. D. a decrease in the price of the firm’s debt - means increase in interest rate as price decreases. So an increase in the firm’s expected growth rate will most likely lead to an increase in a firm’s capital investment in projects. Does it make sense?
Auro Wrote: ------------------------------------------------------- > Given the following options, I would go for A by > eliminating other 3 options > > B. an increase in the firm’s expected marginal tax > rate - will decrease the project’s after tax cash > flow. > > C. an increase in the firm’s systematic risk as > measured by beta - increase in risk will increase > the required rate of return. > > D. a decrease in the price of the firm’s debt - > means increase in interest rate as price > decreases. > > So an increase in the firm’s expected growth rate > will most likely lead to an increase in a firm’s > capital investment in projects. > > Does it make sense? It does make sense. But the question is still confusing.