Question
In: Finance
As debtholders rank ahead of shareholders, it is expected that the required rate of return on...
As debtholders rank ahead of shareholders, it is expected that the required rate of return on debt will be higher than the required rate of return on shares. Discuss the validity of this statement.
paragraph answer:
Solutions
Expert Solution
Yes, it is true that debtholders rank ahead of shareholders in case the company goes bankrupt. This means before the shareholders are paid, the company first pays the debtholders, and then if anything is leftover then the shareholders are paid.
But, the required rate of return on debt will be lower than the required rate of return on shares. As stated above debtholders have a claim on the company's assets first before shareholders are paid. For this privilage, debtholders accept a lower rate of return.
And, shareholders expect a higher rate of return for taking on the additional risk as they are the last ones to be paid after the bondholders are paid.
So, to summarise, the cost of debt < the cost of equity
jeff jeffy answered 2 years agoRelated Solutions
As debtholders rank ahead of shareholders, it is expected that the required rate of return on...
As debtholders rank ahead of shareholders, it is expected that
the required rate of return on debt will be higher than the
required rate of return on shares. Discuss the validity of this
statement.
What is the difference between the expected rate of return and the required rate of return?...
What is the difference between the expected rate of
return and the required rate of return?
What does it mean if they are
different for a particular asset at a particular point in
time?
Explain the difference between required rate of return and expected rate of return. If they are...
Explain the difference between required rate of return and
expected rate of return. If they are different at a specific point
in time, what does it mean?
2. What is the difference between an expected return and a total
holding period return?
3. How does investing in more than one asset reduce risk through
diversification?
What is the difference between the expected rate of return and the required rate of return?...
What is the difference between the expected rate of return and
the required rate of return? What does it mean if they are
different for a particular asset at a particular point in time?
please a new and different answer. Thank you
Explain the differences between expected return and required rate of return?
Explain the differences between expected return and required
rate of return?
3a. Why are expected rate of return and required rate of return on an asset synonymous?...
3a. Why are expected
rate of return and required rate of return on an asset synonymous?
When can they be different?
3b. What is the
possible range of values for Beta?
Please provide
detailed answers.
1. Explain the difference between the required rate of return and the expected rate of return....
1. Explain the difference between the required rate of return
and the expected rate of return. If they are different at a
specific point in time, what does it mean?
2. What is the difference between an expected return and a total
holding period return?
3. How does investing in more than one asset reduce risk through
diversification?
1. Explain the difference between required rate of return and expected rate of return. If they...
1. Explain the difference between required rate of return and
expected rate of return. If they are different at a specific point
in time, what does it mean?
2. What is the difference between an expected return and a
total holding period return?
3. How does investing in more than one asset reduce risk
through diversification?
1. Explain the difference between a stock's expected rate of return, required rate of return and...
1. Explain the difference between a stock's expected rate of
return, required rate of return and its' realized after-the-fact
return?
2. What is the beta of a stock measuring? Why is it argued that
beta is the best measure of a stock's risk?
3. Overall, what are some important concepts for individual
investors to consider when evaluating the risk and returns of
various investments?
What is the required rate of return on a share that is expected to pay a...
What is the required rate of return on a share that is expected
to pay a constant dividend of $6.00 every year in perpetuity and is
priced at $40.00?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Trust, or lack of trust, is an increasingly important issue in today’s organizations.71 In today’s uncertain...
- In this programming assignment, you will write C code that performs recursion. For the purpose of...
- Suppose you purchase one WM May strike=102 call contract at $5 and write one WM May...
- The three call options issued by Tesla Inc are listed below. Suppose that the current price...
- 1. Explain why times of economic distress caused classical liberalism to fall out of favor.
- To demonstrate the practical implementation of the public\private encryption, you have been asked to compete the...
- Suppose we are thinking about replacing an old computer with a new one. The old one...
ADVERTISEMENT