Question

1. According to M&M Proposition I with taxes, Select one: a. the optimal capital structure is...

1.

According to M&M Proposition I with taxes,

Select one:

a. the optimal capital structure is 100% debt.

b. the optimal capital structure is 50% debt.

c. the optimal capital structure is 25% debt.

d. the optimal capital structure is 0% debt.

e. capital structure decisions are irrelevant.

2.

In a normal liquidation situation, ___________ are lower than preferred stockholders on the priority list of claims on liquidation proceeds.

Select one:

a. contributions to employee benefit plans

b. consumer claims

c. common stockholders

d. unsecured creditors

e. administrative expenses associated with the bankruptcy

Homework Answers

Answer #1

Question 1 " The optimal capital structure is 100% debt."

According to the Modigilani-Miller proposition 1 with taxes, the company should be financed entirely with debt because we take the tax deduction on the debt which increases the value of levered firm and lowers the cost of borrowing for the firm.

The Value of the company is determined by the present value of all the cash flows and the tax deductibility increases the present value of cash flows thus increasing the firm's value.

Question 2 " Common Stockholders"

In a Normal liquidation scenario, the creditors of the company are paid first, followed by the preferred stockholders and in the last common stockholders are given priority. Therefore, The correct option is C

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