Reference no: EM133072376

1. Suppose the yield curve is descending or downward sloping yield curve. What does it say about the future outlook of the economy and in what type of bonds investors should invest in?

2. Explain the likely effects on dividend-payout ratios of each of the followings.

-Interest rates decrease substantially;

-Company profitability is negative;

-Prospectus requirements are tightened, increasing the cost of share issues;

-Personal income (but not capital gains) tax increases3. As the cost of debt, k_d, is always less than the cost of equity, k_e, companies should maximise the use of debt to maximise return. Comment on this statement.

4. In a world of tax, if a firm went from a very low debt level to successively a higher levels of debt, what would happen to share price? Explain your answer.